Offshore and Marine - RHB Research 2015-10-20: A Revealing 15 ¾-Year Total Returns Analysis

Offshore & Marine EZION HOLDINGS LIMITED 5ME.SI KEPPEL CORPORATION LIMITED BN4.SI SEMBCORP INDUSTRIES LTD U96.SI SEMBCORP MARINE LTD S51.SI

How much do the oil & gas components of Singapore Inc add value to shareholders?

A surprising amount, based on our 15 ¾-year total returns analysis, with Keppel Corp and SembMarine both delivering 14.7% annualised returns since Jan 2000.
We believe this can be repeated, especially from the low base today caused by the oil price crisis.
Incidentally, their returns handily trump both the Straits Times Index and S&P 500, contrary to prevailing market perception.

A SGD1m investment in either Keppel Corp (Keppel) (KEP SP, BUY, TP: SGD10) or Sembcorp Marine (SembMarine) (SMM SP, NEUTRAL, TP: SGD2.60) on 1 Jan 2000 would have resulted in a c.SGD8.67m holding on 30 Sep 2015, realising an annualised return of 14.7% in a 15 ¾-year holding period. This assumes reinvestment of dividends back into their respective stocks.
Keeping dividends in zero-return cash would have yielded total returns of 12.2-13.1% pa.
These returns figures are far above what the STI and S&P 500 delivered, and they are all the more impressive when one considers the fact that Keppel’s 12-month return to Sep 2015 was negative at -31.8% and SembMarine’s was -36.2% due to the oil price crash last year.

An investor in SembMarine would have earned 12.7% per year from 2005, vs 10.5% in Keppel. The period of 2005-2015 was characterised by a massive rig-building boom in the early years, with both companies still working on near-record orderbooks today. However, since 2010, an investor in Keppel would have earned 3.7% annually while a SembMarine investor would have lost 3.8% over the same period, as the higher yield and operational diversification of Keppel shielded investors from a negative return.

We think so. Both stocks’ 30-40% drop last year has set up a much lower base from which to deliver such above-market returns in the next decade. Oil consumption will likely grow to > 100 million barrels per day (mmbpd) within five years from c.95mmbpd today, forcing oil prices up to > USD80/barrel (bbl) long-run marginal costs from high-cost sources. We believe even a modest recovery in this oil price level would be sufficient to reverse the flood of negative sentiment prevalent today.

Today, over a 12- month horizon, we prefer Keppel over SembMarine given the former’s high yield and operational diversity. However, over the truly long run, SembMarine may outperform on the strength of its focus, if the 10-year record is any guide.

How do Sembcorp Industries (Sembcorp) (SCI SP, BUY, TP: SGD4.20) and Ezion (EZI SP, BUY, TP: SGD1.60) stack up? Sembcorp has a weaker 16-year record at only 6.7% annually, but we believe this is picking up due to its increasing focus on high-return overseas utilities assets. Ezion has been a star – returning 33% annually since 2005, and a repeat from today’s low base looks highly likely.

Lee Yue Jer CFA RHB Securities | http://www.rhbgroub.com/ 2015-10-20

RHB Securities SGX Stock Analyst Report BUY Maintain BUY 1.60 Same 1.60

BUY Maintain BUY 10.00 Same 10.00

BUY Maintain BUY 4.20 Same 4.20

NEUTRAL Maintain NEUTRAL 2.60 Same 2.60