Offshore & Marine - CIMB Research 2016-03-08: Worst may be over but upcycle not started yet

Offshore & Marine - CIMB Research 2016-03-08: Worst may be over but upcycle not started yet Offshore & Marine SEMBCORP MARINE LTD S51.SI  KEPPEL CORPORATION LIMITED BN4.SI  SEMBCORP INDUSTRIES LTD U96.SI  YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI  SINGAPORE TECH ENGINEERING LTD S63.SI  EZION HOLDINGS LIMITED 5ME.SI  CSE GLOBAL LTD 544.SI 

Offshore & Marine - Worst may be over but upcycle not started yet 

  • The verbal promise of production cuts by OPEC could sustain oil price in the range of US$40-50/bbl in the coming months. 
  • The recent frenzy in the O&M sector assumes that we are in a super cycle, implying that yards will win c. S$10bn of orders in 2016-17. 
  • We think the S$2.4bn provisions sector-wide should suffice for now and upgrade the sector from Underweight to Neutral. 
  • We choose to stick with the more ‘boring’ stocks, with top picks SCI, STE and CSE


Oil price teaser 

  • The oil price rise that started in Feb 16 is premised on the hope that OPEC and Russia freeze output at Jan levels. However, there is still global oversupply, with present production surplus of 2mbpd. US crude oil stocks (excluding the SPR) were at a historical high of 518m barrels at end-Feb 16 and Iran still has room to pump up another 1m barrels post-sanction. 
  • Although shale production has tapered slightly, any spike in oil price may lead to taps being “turned-on” and result in range-bound oil price of US$40- 50/bbl in the coming months. 

Trading on blind faith 

  • The frenzy in the Singapore O&M sector during the past week is an indication that the market is trading ahead and assuming that oil price has troughed and will normalise at US$50/bbl. 
  • The big caps are trading at a super-cycle average of 18x CY17 P/E, ignoring the default issues from Brazil and assume the yards are reaping in c.S$10bn of orders in 2016-17. 
  • The small caps are trading at 8-10x CY17 P/E (5-year average), oblivious to the crippled utilisation charter rates and glaringly-high leverage. 

S$2.4bn provisions sector-wide in 4Q15 should be sufficient 

  • Fundamentals have not improved in the latest rounds of results, with no major catalysts for order surge, deliveries are being pushed back, charter rates were cut and cancellation risks prevail. 
  • The only positive moving forward is the quantum of further provisions/impairment is likely to be limited, given the whopping S$2.4bn provisions made sector-wide and possible impairment from the Ezra group. 

Credit picture not improved, although working capital has peaked 

  • On average, the sector’s headline net gearing is about 0.7x in FY15. Singapore banks are still supportive, allowing O&M companies to roll over some short-term debts and postponing drawdown of loans by deferring capex requirements. 
  • Working capital among rig-builders should have peaked in FY15 as Sete Brasil construction halted. 

Upgrade from Underweight to Neutral 

  • We upgrade the sector to Neutral, premised on our recent upgrades on STE and YZJ from Hold to Add, as valuations start to look attractive. 
  • Given the significant provisions across the sector, we believe that the negatives have been largely priced in. 
  • Long-term investors should focus on companies with earnings growth, strong balance sheet and decent valuation including SCI, STE and CSE. 
  • We are cautious on SMM’s super-cycle valuation of 22x CY17 P/E and urge investors to take profit on the recent surge.


Valuation and recommendation 


Keppel Corp, maintain Hold 

  • Maintain Hold but we upgrade our target price to S$5.53, still based on a 30% discount to RNAV for properties, higher O&M book value of 4x (previously 2.5x) in line with the ROE of 35%.

Sembcorp Marine, least preferred 

  • Maintain Reduce and target price of S$0.90, still based on 0.7x FY16 P/BV (average 7% ROE). In our view, its current valuation is a clear mismatch against its declining order momentum and stretched balance sheet. 
  • SMM is priced at a super-cycle valuation of 22x CY17 P/E, with significant downside risks from the possibility that the yard fails to sell the 10 rigs on hand (North Atlantic semi-sub, Marco Polo jack-up, three units from Oro Negro, two from Perisai and three built speculatively). 

Sembcorp Industries, utilities continue to be discounted 

  • Maintain Add and SOP-based target price of S$3.10. Using the current market price as SMM’s fair value in SCI’s SOP, we estimate that the market is ascribing only S$1.20/ share for utilities that implies an undemanding 6x FY17 P/E, below its historical average of 7x. 
  • Longer-term catalysts could include the unlocking of value in India over the next 2-3 years, when TPCIL and NCCPP reach a steady state of contributions.

Yangzijiang Shipbuilding, short-term trade 

  • Maintain Add and target price of S$1.10, still based on 0.85x FY16 P/BV for possible write-downs for its jack-up rig on order. The stock is trading at 1 s.d. below its 5-year mean. 
  • We advise investors to trade the stock on a short-term basis, as challenges to the shipbuilding and shipping industry remain. 
  • Higher-than-expected order wins could catalyse the stock. 

ST Engineering, strongest balance sheet in the sector 

  • Maintain Add and target price of S$3.17 on blended valuations. 
  • While its peers are suffering from tight gearing and customer default risks, STE’s net cash of c.S$200m (including bonds) at end-Dec 15 offers a safe refuge, with a c.80% dividend payout in FY16. 
  • Catalysts could come from stronger earnings growth across segments.

Ezion Holdings, maintain Add 

  • Maintain Add and target price of S$0.63, still based on 0.55x FY16 P/BV (in line with its average ROE in CY16-17). 
  • Catalysts could come from stronger-than-expected quarterly earnings and lower-than-expected rate cuts on its service rigs.

CSE Holdings, small-cap top pick 

  • Maintain Add and target price of S$0.52, based on 9x CY17 P/E (at 10% discount to its 5-year mean). CSE stands out with its strong balance sheet, steady margins and decent yield. It is trading at 0.9x FY16 P/BV versus 11% ROE. 
  • Catalysts could come from stronger US dollar and order intake.


LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-03-08
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 5.53 Up 4.39
REDUCE Maintain REDUCE 0.90 Same 0.90
ADD Maintain ADD 3.10 Same 3.10
ADD Maintain ADD 1.10 Same 1.10
ADD Maintain ADD 3.17 Same 3.17
ADD Maintain ADD 0.63 Same 0.63
ADD Maintain ADD 0.52 Same 0.52


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