Offshore & Marine Sector - UOB Kay Hian 2015-09-01: Cutting Target Prices On A Lower Oil Price Benchmark (Part 1 of 2)

Offshore & Marine Sector

Offshore & Marine – Singapore Cutting Target Prices On A Lower Oil Price Benchmark

  • We lower our oil price benchmark from US$70/bbl to US$60/bbl, as there were several downgrades in consensus forecasts in August. 
  • Accordingly, we cut our stock target prices by 10-25%. We adopt a P/B valuation methodology which is based on a regression analysis of P/B to Brent oil prices. 
  • Our top picks remain SCI, Ezion Holdings and Triyards. 
  • Maintain MARKET WEIGHT. 



WHAT’S NEW 


 We cut our stock target prices by 10-25%, as we lower our Brent crude oil price benchmark from US$70/bbl to US$60/bbl. 

  • Our Brent crude oil price estimates for 2015 and 2016 are based on the forecasts of 38 organisations. There were some downward revisions by consensus in August. Following an update of the latest consensus forecasts, the average Brent oil price forecast for 2016 is US$67/bbl, down from US$72/bbl as of end July. Thus, we lower the oil price benchmark for our stock target prices from US$70/bbl to US$60/bbl. 

 P/B yardsticks at US$60/bbl. 

  • For the Singapore rig builders, we use Sembcorp Marine’s (SMM) 1-year forward P/B as the base for valuing large-cap offshore-heavy-engineering stocks. At U$60/bbl for Brent oil price, our regression analysis estimates a 1-year forward P/B of 2.0x. 
  • For Singapore mid/small-cap oilfield service providers, we use the OSV Owner segment’s historical 1-yr forward P/B to Brent price oil as a valuation guide. At US$60/bbl for Brent oil, our regression analysis estimates a 1-year P/B of 0.75x. Premium or discount is levied, depending on respective stock fundamentals. 


ACTION 


 No change in stock recommendations. 

  • Maintain MARKET WEIGHT. Despite our steep target price cuts, there is no change in our stock recommendations. With the current share prices at near cyclical trough valuations, many stocks are deep in value. 
  • The global O&G industry still faces poor earnings visibility as capex and operating costs are being cut. An austerity drive now permeates the entire industry - among oil companies, service providers and shipyards. 

 4Q14 and 1Q15 saw a fall off the cliff. 

  • While activities are slowly returning, oilfield services companies are expected to post poor earnings performance in 2015. A meaningful recovery might be seen only in 2016. 
  • In the meantime, stock prices of mid- and small-cap oil service stocks have fallen close to cyclical trough valuations of 0.5x. Our top stock picks in the Singapore offshore & marine (O&M) sector remain Sembcorp Industries (SCI), Ezion and Triyards. 
  • We recently upgraded Ezra to BUY following its announcement that Chiyoda – a 33%-owned associate of Mitsubishi Corp - is taking a 50% stake in subsea unit EMAS AMC. 


ASSUMPTION CHANGES / CATALYSTS / RISKS 


 Oil price is the key risk. 

  • Two key risks in the sector are: 
    1. protracted low oil prices, and 
    2. another sharp fall in oil prices. 
  • Both would significantly impede future capex spending, which needs to rise to help return activity levels to post-crash levels. 


STOCK RECOMMENDATIONS 


 COSCO (S) Holdings (SELL/Target: S$0.36). 

  • The company reported a quarterly loss in 2Q15. The current downturn has exacerbated the challenging business climate for Chinese shipyards. Possible provisions for its drillship arbitration case remains as an overhang on its earnings. Its net gearing is the highest among companies under our coverage at 302%. We ascribe a 70% discount (2016F P/B: 0.6x) owing to the balance sheet risk and poor earnings outlook. 

 Ezion Holdings (BUY/Target: S$1.05). 

  • Earnings visibility remains good amid the challenging business environment. Notwithstanding unit switching in 2Q15 and 3Q15 and current operational delays, charter contracts remain intact and customer demand is healthy. We ascribe a valuation of 2016F P/B of 0.75x for OSV owners. For Ezion, we accord it a 10% premium (2016F P/B 0.82x) in view of its earnings visibility and an ROE that is higher than the sector average. 

 Ezra Holdings (BUY/Target: S$0.176). 

  • We view its tie-up with Chiyoda (33%-owned associate of Mitsubishi Corp) positively. We expect Ezra’s large discount to the sector average to narrow as it concludes its JV with Chiyoda by 4Q15. 

 Keppel Corporation (HOLD/Target: S$7.90). 



  • With the privatisation of Keppel Land, the company has reduced its reliance on the O&M business (2Q15: 43% of net profit). Nevertheless, the current downturn of the global O&G sector is a trying time. New contract wins ytd are low, amounting to S$1.5b (2014: S$5.5b, 2013: S$7.0b, 2012: S$9.9b). 
  • We value Keppel’s O&M business at 2016F P/B of 1.7x. This is at a 15% discount to our estimated P/B of 2.0x with a Brent oil price at US$60/bbl. Our target price for Keppel is based on a SOTP method. 


Nancy Wei | Foo Zhiwei | http://www.rhbgroub.com/ RHB Securities 2015-09-01
SELL Maintain SELL 0.36 Down
BUY Maintain BUY 1.05 Down
BUY Maintain BUY 0.176 Down
HOLD Maintain HOLD 7.90 Down


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