Shipyard – Singapore - UOB Kay Hian 2017-09-15: Orders Everywhere But Few Contract Wins

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

Shipyard – Singapore - Orders Everywhere But Few Contract Wins

A review of likely yard tender awards in 2017 shows the likelihood of contract wins meeting consensus expectations to be diminishing. The outlook for 2018 looks no rosier, given stiff pricing competition from regional yards.
Sembcorp Marine (SMM) continues to be pricing in a bull-case scenario, while Keppel Corp (KEP) appears oversold regardless of scenario.

Contract wins assumptions are likely to be reviewed. Outlook for the shipyard sector remains weak but a restructuring could catalyse share prices.
Maintain MARKET WEIGHT.

According to Wood Mackenzie, companies that announced changes to their investment plans have trimmed their 2017 capex guidance by about US$2.1b (-3%) in response to weak oil prices.
On a segmental basis, a reduction of US$900m (-5%) was seen for the majors, while NOCS reduced their budgets by US$750m (-26%).

Orders have returned in 2017 on expectations of improving oil prices. However, this has not panned out, resulting in oil companies delaying tender awards on revisions to their budgets. This has led to an increasing number of tender awards shifting into 2018 and beyond.

Year-to-date, new contracts secured by Keppel Corporation (KEP) and Sembcorp Marine (SMM) are about S$800m and S$270m respectively.
Consensus estimates are looking at S$1.5b-2.0b of new contract wins in 2017 for each yard, implying additional contract wins of another S$0.7b-1.2b each for KEP and SMM for the remainder of 2017.
Despite tenderbook being greater than that amount for either yard, the likelihood of securing all that work in 2017 looks challenging as work-starved yards in the region are offering highly competitive pricing.

Current expectations for Sembcorp Marine (SMM) are high, pricing in S$1.0b-1.5b of contract wins for 2017. This seems like a best-case scenario as it appears to be largely banking on the US$1b Poly-GCL project (see table overleaf). In a base case, contract wins for SMM may be lower.
For Keppel Corp (KEP), while ytd contract wins still lag behind expectations, the low profitability of the O&M business relative to its book value of about S$2b leaves its P/B valuation largely unchanged.

Value has emerged for Keppel Corp (KEP) whose current valuation implies 0.5x 1-year forward P/B for its O&M business, vs the 1.3x 1- year forward P/B Sembcorp Marine (SMM) commands. At the very least, KEP’s O&M business should trade at a slight discount to SMM instead of the sharp gap currently implied.
A review of our contract wins assumptions for both yards seems probable in light of the fading outlook of a strong contract upswing in 2017 (and most likely 2018).
Shipyards’ restructuring efforts resulting in exit options for shareholders could likely outweigh the depressed market outlook for the shipyard sector, thus we maintain MARKET WEIGHT.

Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-09-15

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