Offshore & Marine - CIMB Research 2015-10-15: Brazilian real-ity hits

Offshore & Marine - CIMB Research 2015-10-15: Brazilian real-ity hits Offshore & Marine SEMBCORP MARINE LTD S51.SI  KEPPEL CORPORATION LIMITED BN4.SI  VARD HOLDINGS LIMITED MS7.SI 

Offshore & Marine - Brazilian real-ity hits 

  • Vard issues profit warning for 3Q15 and FY15 earnings, quoting operational challenges and negative economic and political trends in Brazil. 
  • Slow yard ramp-up in Vard Promar, delays for LPG carriers, declining efficiencies in Vard Niteroi and Brazilian real depreciation are potential culprits. 
  • Potentially negative spillover for Singapore rig builders; Sete Brasil makes up c.50% of industry’s order book. 

Vard issues profit warning for 3Q15 and FY15 

  • Vard Holdings has issued a profit warning for its 3Q15 and FY15 earnings. It made a net loss of NOK 34m in 1H15. Its 3Q15 results will be released on 11 November 15. Vard’s Brazilian operations have been struggling, especially Vard Promar, which has been weighed down by delays for the LPG carriers and slow ramp-up. Order drought has also resulted Vard Niteroi to be in losses, affecting deliveries of AHTS. 
  • Middle-level talent management could be the key issue hindering the progress of Vard Promar. It is located in Pernambuco, Suape, in under-developed northeastern Brazil, which has a smaller pool of skilled labour. It is also located adjacent to Estaleiro Atlantico Sul, which cancelled the seven drillships contract with Sete Brasil. 
  • We believe that the severe depreciation of the Brazilian real (c.25% since Jul 15 and c.30% YTD) could have also exacerbated overall gloomy Brazilian earnings in 3Q15. Vard incurred forex losses amounting to NOK313m in 1H15, mainly from US$ loans in Brazil while its functional currency is the Brazilian real. 

Weakened real could stall negotiations for KEP and SMM 

  • Although execution risks for Sete Brasil could be limited for both KEP and SMM, we believe the depreciation in Brazilian reals could further hinder negotiations for construction outstanding payment for the drillships and semi-submersibles being built. SMM’s yard in Espirito Santo (southeast Brazil) could also face pressure to ramp up, albeit to a lesser extent vs. Vard Promar given its closer proximity to the state of Rio. 
  • The Brazilian real has depreciated more than 100% since the contracts were awarded to the yards in 2012, making it more expensive for Sete Brasil to build a rig today. In our assumptions, we have factored in indefinite postponement for units that have not started construction for both yards. Please refer to our sector note ‘Brazilian Wax and Wane’ dated 2 Sep 15. 

Petrobras slashing budget and rig fleet 

  • Petrobras further reduces its capital budget, cutting planned spending for 2015 by US$3bn to US$25bn and by US$8bn to US$19bn for 2016, citing low crude oil prices and unfavourable exchange rates. It has also been closing in on a series of deals to reduce the size of its rig fleet in Brazil and slashing day rates from the drillers. Petrobras is aiming for a fleet of 35 units by 2016, which is almost half that in 2014. 
  • Ensco has agreed to accept the early release of one out of four semi-submersibles that were supposed to end in 2017 in return for a 10% rate cut and extension for the remaining three to 2018. Diamond Offshore will see some of its drillships and semisubs leave Brazil, with no more extension beyond 2015. Seadrill will see some cuts by as much as 50% for some of its drillships. Maintain Neutral 
  • We stay Neutral on the sector, premised on valuations – big caps -1 s.d. and small caps -2 s.d. from the 5-year average. Our top picks are Keppel, Ezion and PACRA. 

Highlighted companies 

Keppel Corporation ADD, TP S$7.46, S$7.29 close 

  • Contribution from property and other stubs could still maintain investor interest in the stock. 

Sembcorp Marine REDUCE, TP S$2.18, S$2.60 close 

  • Order cancellations and heightened net gearing could be de-rating catalysts. Operating leverage could also be a concern for its new integrated yard given dwindling ship repair/conversion work. 

Vard Holdings Ltd REDUCE, TP S$0.35, S$0.48 close 

  • Maintain Reduce, with potential negative triggers from an order drought and continued weak execution.

LIM Siew Khee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2015-10-15
CIMB Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 0.35 Same 0.35
ADD Maintain ADD 7.46 Same 7.46
REDUCE Maintain REDUCE 2.18 Same 2.18