Offshore & Marine – Singapore - UOB Kay Hian 2017-03-10: Sector Remains Cashflow-stressed; Clear Survivors Emerge

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Singapore Offshore & Marine Sector Offshore & Marine Sector Outlook EZION HOLDINGS LIMITED 5ME.SI TRIYARDS HOLDINGS LIMITED RC5.SI SEMBCORP MARINE LTD S51.SI KEPPEL CORPORATION LIMITED BN4.SI

Offshore & Marine – Singapore - Sector Remains Cashflow-stressed; Clear Survivors Emerge

• FY16 saw impairments totalling US$1.7b, largely driven by small-mid cap OSV owners impairing the value of their assets. 
• Shipyards saw a plunge in impairments and it appears the worst is over, contingent on orders returning strongly with oil price stability. A review of companies’ core margins highlights several candidates that will clearly survive the downturn. 
• We downgrade Triyards to HOLD. Prefer asset owners like Ezion to play the recovery. 
• Maintain MARKET WEIGHT.

WHAT'S NEW

Impairments up 77% for small-mid caps. 

• Small-mid caps saw total impairment value jump from US$566m in FY15 to US$999m in FY16. The bulk of impairments arose mainly from OSV owners, for which the impairments to PPE and receivables accounted for 65% of the total. 
• Impairments were pre-dominantly led by the Ezra group of companies (Ezra, EMAS), and PACC Offshore.

Surprisingly low impairments from large-cap shipyards. 

• Large-cap shipyards saw total impairment value of US$691m, down 59% yoy. 
• The bulk of the impairments came from Keppel Corp and Yangzijiang (YZJ) - the former was due to the mothballing of yards and asset impairment of the CAN-DO drillship, while the latter was owing to impairments taken for its fleet of owned vessels.

Sector remains cashflow pressured. 

• The sector remains pressured on cashflow in FY16, with core EBITDA margin declining by 4.2ppt on average to 16.2%. The small-mid caps saw a greater decline, at 4.7ppt to 17.6%, while the large caps fell by 2.5ppt to 11.0%. 
• We note that the large cap results are skewed heavily by the Chinese shipyards’ sharp drop in core EBITDA margin. Excluded, the remaining large caps (Singapore shipyards) actually saw a 1.1ppt improvement in EBITDA margin to 15.1%.

Total debt falls by US$541m. 

• Measured as of end-16, total debt in our universe of O&G names fell by US$541m, from US$17.2b to US$16.7b. 
• Net gearing remains elevated for most O&M names, but we are somewhat relieved that average net gearing rose by 4.7ppt on average.

STOCK IMPACT

Are the impairments largely done? 

• Perhaps. This hinges on the assumption that oil price remains stable above US$40-50/bbl. But this assumption has come into question recently as oil inventories continue to soar. 
• For the large caps, this is contingent on orders returning in a sizeable way that provides work for its remaining yard capacity, failing which, we expect another round of impairments. For small-mid caps, it remains uncertain at this juncture. With 2017 likely to be the third consecutive year of the downturn, already stretched balance sheets will be stretched further, possibly resulting in 2017 as the year of bankruptcies. 
• Another wave of distressed assets will flood the market, impacting asset values and possibly mandating further impairments.

Clear survivors to the downturn are emerging. 

• Based on the respective companies change in core EBITDA margin and net gearing as of end-16, the clear survivors to the downturn are steadily emerging. In our opinion, key to surviving this downturn requires strong cashflow generation and continued de-leveraging. Notable mentions, based on positive increases in core EBITDA margin and reduction in net gearing (large caps excluded): 
  1. Dyna-mac Holdings (DMHL SP, Not Rated): Core EBITDA margin remains strong at 14.5%, with the company in net cash. However, the low orderbook is a concern. Possible M&A candidate given the few number of major shareholders and clean balance sheet.
  2. Mermaid Maritime (MMT SP, Not Rated): Mermaid Maritime (Mermaid) saw core EBITDA margin improve the most amongst peers. At a robust 16.0%, and healthy net cash position, Mermaid is well-positioned to capture the likely recovery in subsea and pipelay activity in 2017. We think it unlikely that Mermaid will be privatised.
  3. Nordic Group (NRD SP, Not Rated): A diversification strategy into plant maintenance has seen Nordic grow both core EBIT and EBITDA margin by a healthy 3-4ppt in a downturn. Balance sheet remains strong in a net cash position. With 2017 being another turnaround year for refineries, Nordic is expected to see improved earnings from its maintenance business in 2017.

Preferred picks within our coverage: Ezion. 

• We continue to prefer asset owners vs yards as they will be the first beneficiaries of higher activity in the sector. While Ezion saw its worst earnings performance in 2016 due to operational delays, the improved oil outlook should help with the success of its redeployment plans. 
• We are reassured that despite its woes, core EBITDA margin remains at an impressive 60.1% (FY15: 68.1%).

Downgrading Triyards to HOLD. 

• Post a review, we downgrade Triyards to HOLD, TP: S$0.27 owing to a corporate guarantee issue.

ACTION

• Maintain MARKET WEIGHT. 
• We continue to expect a significant increase in oil majors’ capex only in 2018, assuming price stabilises at US$50-60/bbl for most of 2017. Between now and then, we expect the sector to largely remain a trading play at best. 
• Earnings are likely to remain weak in the coming quarters, unless buoyed by a strong pick-up in utilisation or contract wins. 
• Stocks likely to have a high reaction to oil price are (trading ranges in parenthesis): Ezion (S$0.33 – S$0.55), Keppel Corp (S$6.20-S$6.99), Sembcorp Marine (S$1.19 – S$1.97)

Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-10

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