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Offshore & Marine - CIMB Research 2015-10-13: Extend and pretend II – Cloudy with a chance of cash calls

Offshore & Marine - CIMB Research 2015-10-13: Extend and pretend II – Cloudy with a chance of cash calls Offshore & Marine EZION HOLDINGS LIMITED 5ME.SI  KEPPEL CORPORATION LIMITED BN4.SI  PACIFIC RADIANCE LTD T8V.SI 

Extend and pretend II – Cloudy with a chance of cash calls 

  • Credit picture of our coverage is holding up better than the other Not Rated cos. We see scope of financial restructuring or cash calls for Otto Marine and Swiber. 
  • Cloudy but no thunderstorm forecasted. The saving grace is that risk of insolvency and the threat of contagion and credit freeze for the sector are still far off. 
  • Sete Brasil is finalizing its restructuring plans, which would dissipate fears of cancellation of all rigs being built at the Singapore yards. 
  • Our on-the-ground checks reveal that the companies are doing all they can to stave off the red ink. Bankers are worried. They want to “bank with the winners”. 
  • We concur. We choose the companies that can emerge from the oil tumult as sector champions. Ezion, Keppel and PACRA are our preferred picks

Credit picture of the O&M sector 

  • Despite upward pressure on net gearing and debt service coverage, our research leads us to believe that the companies under our coverage are still able to comfortably service their interest payments, with an average interest cover of 5.2x for FY15. The credit metrics for the Not Rated companies, however, are stretched. We see scope for possible financial restructuring or cash calls for Otto Marine and Swiber. 

Stress testing O&M – what if oil prices slide to US$30 

  • When stressed, we conclude that although credit risks are heightened for some of the companies in our coverage universe (Nam Cheong, PACRA and Swissco), there is no material rise in risk of cash calls or insolvency. The Not Rated companies are in a more precarious situation, in our view. The saving grace, we believe, is that the risk of insolvency and the threat of contagion and credit freeze for the sector is still far off. 

Sete Brasil is finalizing its restructuring plans 

  • The working capital requirements and net gearing of the Singapore rig-builders have increased, with Sete Brasil stopping payments since Oct 2014. We had factored in a one-year delay for the rigs that have started construction with final delivery in 2019 and assume indefinite delays for rigs that have not achieved major milestones – two units for Keppel and three units for SMM. 

Survival of the fittest – on-the-ground feedback 

  • Some of the companies are negotiating with the banks to allow them to service only the interest-portion of their amortizing loans. Some are also seeking refinancing via loan top-ups, as they have paid off a portion of the debt principal over the past years. 

Picking the sector champions 

  • We maintain our Neutral stance on the sector. We pick companies which are financially robust, have a good management team and would be competitively positioned for the next upturn. Ezion, Keppel and PACRA tick the right boxes, in our view.


Highlighted companies


Ezion Holdings ADD, TP S$1.30, S$0.73 close 

  • Backed by strong cash flows from its longterm contracts (reflected in FY15 EBITDA interest coverage of 6.7x), we argue that its net gearing of 1x is manageable. Ezion does not have any notes payable in 2016-17, and it should not face refinancing pressures during this tough operating environment. 

Keppel Corporation ADD, TP S$7.46, S$7.44 close 

  • We prefer Keppel to SMM, mainly for its earnings and RNAV buffer from property. Going by its recent acquisition of Cameron’s Letourneau rig design division, Keppel is positioning for a bigger market share when the rig market recovers

Pacific Radiance ADD, TP S$0.81, S$0.39 close 

  • PACRA is trading c.40% below its estimated liquidation value (S$0.62/share), and we believe that financial risks are mispriced. We gain comfort from our RNAV calculations, as it has one of the cleanest balance sheet in the sector, and because its fleet of vessels is relatively more realizable.



YEO Zhi Bin CIMB Securities | LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2015-10-13
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.30 Same 1.30
ADD Maintain ADD 7.46 Same 7.46
ADD Maintain ADD 0.81 Same 0.81


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