Shipyard – Singapore - UOB Kay Hian 2017-06-20: Recovery In Production Orders For 2017 May Be Weaker Than Expected

Shipyard Sector KEPPEL CORPORATION LIMITED KEPPEL CORPORATION LIMITED BN4.SI SEMBCORP INDUSTRIES LTD U96.SI SEMBCORP MARINE LTD S51.SI

Shipyard – Recovery In Production Orders For 2017 May Be Weaker Than Expected

Floating Production System (FPS) orders have risen on the back of higher oil prices since the start of 2017. While projects slated for award over 2017-19 remain fairly robust, statistics are starting to show more projects being deferred beyond 2017.
Projected capex spend is also likely to be smaller than forecast for 2017, and expectations for a strong production order-led recovery may not pan out.
Prefer Keppel over SMM due to its diversified earnings base.

According to the latest Energy Maritime Associates (EMA) report, the average floating production system (FPS) order since 2008 fell further from 1.5 units to 1.4 units per month.
The recent stability in oil prices saw five new orders placed - one FPSO and four FSRUs - as compared to none placed in the same period last year.

As of Apr 17, there were 229 projects in the appraisal, planning or bidding/final design stages. These represented a 5% yoy decline (2Q16: 240) but a 1% qoq improvement (1Q17: 226).
Projects in the bidding/final design stage as a proportion to total projects currently stand at 24%, having bottomed out at 21% in 3Q16. The improvement, however, is due to low base effect. Projects as a total number of floater projects continue in a downward trend.

The continued stability of oil prices continues to see awards for projects in the bidding/final design stage remaining relatively unchanged at 54 units (4Q16: 57).
The project pipeline for 2017-19 remains robust, with only three orders in this stage falling back into the planning stage. That said, project award deferrals rose from 13 (21%) in 4Q16 to 16 (28%) in 2Q17.

Despite five contract awards in 1Q17, capex for award in 2017-19 is expected to be higher at US$43.4b, vs prior projection of US$37.5b in 4Q16. Capex spend has also been brought forward, with current projections showing a higher capex spend for 2017 as compared to two quarters ago.

The latest numbers from the EMA generally paint a brighter outlook for floating production contract awards. However, it is tinged by shifting award timelines that renders it difficult to call an outright order recovery.
Despite the high projection of at least US$17.1b of contract awards for 2017, the year thus far has only seen contract awards at less than a quarter of that amount, by our estimates. This implies that awards are either likely to all fall within 2H17 or forecasts are overly optimistic and likely to see a portion of it slip into 2018 and beyond. The latter seems more likely.

Between the two shipyards, Keppel remains a preferred pick to ride through the eventual recovery in the Singapore shipyard sector. Its diversified businesses provide a stable earnings base which will be needed in this protracted downturn.
While we recognise Sembcorp Marine (SMM) to have significant upside given its large tenderbook, this hinges largely on its ability to secure the necessary contract wins. In the meantime, Sembcorp Marine's share price is likely to drift downwards on weak earnings, exacerbated by potential order execution issues as demonstrated in 1Q17.

Keppel trades at a lower 0.9x 1-year forward P/B vs SMM’s 1.3x. This is despite the former delivering earnings breakeven for the O&M unit in 1Q17, as compared to SMM which delivered a core loss.

Our recommendations remain unchanged: HOLD Keppel (Target Price: S$6.55) and SELL SMM (Target Price: S$1.43)

Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-06-20

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