Offshore & Marine Sector Update - UOB Kay Hian 2015-09-28: A Long March

SEMBCORP INDUSTRIES LTD U96.SI  TRIYARDS HOLDINGS LIMITED RC5.SI  EZION HOLDINGS LIMITED 5ME.SI  SEMBCORP MARINE LTD S51.SI  SEMBCORP INDUSTRIES LTD U96.SI 

Offshore & Marine – A Long March 

  • SMM’s contract wins ytd are ahead of our expectation while Keppel’s contract wins are lagging. 
  • Sete Brasil is still seeking a financial solution while SMM faces headwinds in its rig projects for Oro Negro. 
  • Our top stock picks remain SCI, Ezion and Triyards. 
  • Maintain MARKET WEIGHT. 

WHAT’S NEW 


 Low rig orders thus far. 

  • Global demand for drilling rigs remains muted. Based on a compilation from various sources, 2015 saw six new orders for drilling rigs, vs 28 in 2014. New orders have been mainly placed at Chinese yards, and came from non-mainstream clients such as Beacon Holdings, Sinopec and Alliance Offshore Drilling (AOD). 

 However, 3Q15 saw SMM’s contract wins surpassing our full-year expectation. 

  • Keppel Corp (Keppel) secured only S$125m worth of contracts (comprising repairs, upgrades, conversion and modification) in 3Q15, while Sembcorp Marine (SMM) secured a US$1b (S$1.4b) topside fabrication contract from Maersk Oil. This brings Keppel’s ytd contract wins to S$1.6b, or 64% of our full-year forecast of S$2.5b, while SMM’s ytd contract wins is S$2.7b, or 110% of our full-year forecast of S$2.5b. 
  • Noticeably, none of the orders are for drilling rigs, and comprise mostly offshore vessels in other asset classes, such as FPSOs, liftboats and heavy-lift construction vessels. Singapore yards have – to some certain extent – diversified their capabilities away from rig building. 

 Oro Negro in talks to delay last two rigs with SMM. 

  • According to the latest Upstream report (dated 25 September), Oro Negro has initiated talks to delay its remaining two drilling jack-ups, Supremus and Animus, with SMM. In July, Oro Negro had attempted to delay delivery of its fourth jack-up unit Vastus with SMM. The Vastus and Supremus were completed in June and August this year respectively, with Animus due for completion in Oct 15. All units are completed/near completion. 
  • Oro Negro is 22.49% owned by Temasek, with the remainder held by Ares Management (22.54%) and Mexican-owned private equity firm, Axis Capital Management (49.5%). 

 Sete Brasil is still searching for a financial solution. 

  • Petrobras and other investors reached an agreement on Sete Brasil’s restructuring plan on 28 August, which saw Sete Brasil reduce the number of rigs under construction from 28 to 15. Keppel’s and SMM’s contracts remain fully intact. Details of the restructuring plan are scant, but various media sources indicate that the plan is not formalised owing to Petrobras’ uneasiness with the terms. 
  • Keppel and SMM are said to have agreed to self-finance the first few rigs until 1 Oct 15, and are unlikely to proceed beyond until a formal restructuring plan is in place. 

 Sete Brasil’s rig construction progress remains slow. 

  • Based on the latest rig status update from Sete Brasil, construction progress remains almost unchanged for the two rigs due for delivery in 2015. Arpoador (SMM) and Urca (Keppel) saw 0.0% and 0.3% change respectively in their completion schedule. Construction progress remains slow, with Keppel’s BrasFELS and Enseada advancing construction by 0.3-5.8%, as shown in the completion schedule above. 


ACTION 


 SMM remains vulnerable to O&G downturn. 

  • While SMM has outperformed Keppel in contract wins this year, it remains vulnerable owing to its pure marine status and potential contract cancellation risks. Being a pure marine group, 1H15 results reflected its risk, with SMM reporting a 15% yoy decline in earnings, while Keppel’s earnings were flat at +1.6% yoy. 
  • Besides Oro Negro, Malaysia’s Perisai and Singapore’s Marco Polo are also requesting for a delay in rig delivery (Perisai Pacific 102 and Iron V respectively). 

 SMM faces S$97m profit reversal if Oro Negro cancels. 

  • SMM secured rig orders for Vastus, Supremus and Animus in two separate tranches in 2013, at about US$209m per rig. Payment terms were 20% deposit and 80% on delivery, so US$500m remains outstanding. Netting the 20% deposit and assuming an operating margin of 15%, we estimate US$145m as the uncovered cash cost per rig. 
  • IHS’ latest estimates show that the price of a modern 350ft rig has fallen to US$140m, 3.5% below the uncovered cash cost. If Oro Negro were to cancel the rigs, we believe SMM will be able to sell the rigs and recoup its costs when the market improves. However, it may need to reverse US$68m (S$97m) of profits recognised, assuming 15% operating margin and 100% completion. 
  • Our net profit forecasts for 2015-17 are S$445m, S$450m and S$460m respectively. 

 Keppel is cushioned but we don’t see share price catalysts. 

  • With weak contract wins, weak profits from Keppel’s O&M division are weighing on earnings growth now. The silver lining is Keppel’s more resilient property business, which will offset weak O&M earnings. 


ASSUMPTION CHANGES 


 No change to our earnings forecasts. 

  • Keppel’s and SMM’s contract wins ytd – excluding ship repairs – currently stand at S$1.6b and S$2.7b respectively. While current orderbooks extend to 2019, both groups require new contract wins every year to keep their yards busy. 
  • We maintain our earnings forecasts in spite of SMM exceeding our contract win forecast of S$2.5b as margins of the large contracts from Hereema and Maersk Oil may be low. 

SECTOR CATALYSTS 

  • Oil prices, contract wins and margins. 

RISKS 

  • Lower oil prices and contract cancellations.


Nancy Wei UOB Kay Hian | Foo Zhiwei UOB Kay Hian | http://research.uobkayhian.com/ 2015-09-28
UOB Kay Hian Analyst Report BUY Maintain BUY 4.69 Same 4.69
BUY Maintain BUY 1.05 Same 1.05
BUY Maintain BUY 0.81 Same 0.81
HOLD Maintain HOLD 2.45 Up 2.45


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