Singapore Market Focus - DBS Research 2017-10-13: Checking Up Gains

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KEPPEL CORPORATION LIMITED BN4.SI SEMBCORP INDUSTRIES LTD U96.SI SEMBCORP MARINE LTD S51.SI PACC OFFSHORE SVCS HLDG LTD. U6C.SI

Singapore Market Focus - Checking Up Gains

• Recent interest pick-up in O&M sector can continue on rig market recovery and higher oil prices.
• Brent to average at c.US$60pbl in 2018, charts point to US$75pbl by 2H18.
• Prefer big cap rigbuilders.
• POSH or nothing for OSVs.

Focus shifting to mid-expansion-phase sector outperformers. 

• Investors’ focus is turning towards sectors that could outperform during the mid-expansion phase of the economic recovery. Tell-tale signs are recent outperformance of the yards (capital goods) and construction sector from mid-September. 
• O&M stocks turned up a month ago. The positive trend can continue with signs of the rig market thawing, supported by higher oil prices.

Revival in rig market transactions. 

• Yards are lifted by the strong uptick in rig transactions in recent months, that is typically a positive indicator of stronger demand prospects.
• SembCorp Marine’s latest sale of nine jackup rigs to Borr Drilling for US$1.3bn is further evidence of a rig market recovery. (See report: Sembcorp Marine - DBS Research 2017-10-09: Singapore Rigbuilders - SMM-Borr Inks Landmark Rig Deal)

Brent to average at c.US$60pbl in 2018, charts point to US$75pbl high. 

• Fundamentally, we think Brent will average closer to US$60pbl next year with OPEC supply side cap and faster inventory draw downs. 
• Technically, we see Brent heading to US$65pbl first, followed by US$75pbl by 2H18. Key support is at US$52.5pbl.

Prefer big cap rigbuilders. 

• SembCorp Marine is our preferred proxy. It is the most sensitive to higher oil prices. A potential merger among the Singapore yards is an added catalyst for the stock. 
• SembCorp Industries could benefit from a rerating of its utility business if any rationalisation of the three Singapore yards transforms it into a pure utility play.

POSH or nothing for OSVs. 

• The OSV market is decidedly off the bottom. While many of its peers are debt laden, PACC Offshore Services Holding (POSH) will be a survivor that is poised to ride the upswing. 
• POSH has no bonds outstanding. Undrawn bank lines provide more than sufficient capex cover and working capital. Its strong parentage with high ownership of c.82% by majority shareholder Kuok (Singapore) Ltd makes it a potential privatisation candidate.

WHAT'S NEW

Sector Outperformers Shifting From Early to Mid-Expansion Phase 

•  “Late contraction to early expansion” sector outperformers have done well YTD - Banks, properties (example of consumer discretionary) & technology sectors.
• Focus shifting further to “early expansion to middle expansion sector” outperformers – While banks, properties and technology sectors may still ride on the positive momentum, interest is shifting to Industrials, transportation, construction, capital goods.
• Industrial sector super performer is Yangzijiang (+80% YTD).
• Mixed outcome for industrial transportation sector – China Aviation Oil (+19% YTD), SATS (-4% YTD), SIA Engineering (-5.6% YTD).
• Construction sector has started to outperform – Tuan Sing (+17%), Lian Beng (+10%), YongNam, Chip Eng Seng (+18%) since mid-September.
• O&G sector (capital goods) has come alive! - O&G Index +8.2% since mid-September, led by SembCorp Marine (+16%).
  1. Strong uptick in rig transactions in past six months is typically a positive indicator of stronger demand prospects.
  2. Recent new entrants (North Drilling and Borr Drilling), rumours of Aker Group comeback, China Merchants hunting for distressed operators.
  3. SembCorp Marine’s latest sale of nine jackup rigs to Borr Drilling for US$1.3bn is further evidence of a rig market recovery.

Oil market rebalancing has been achieved - Brent crude to average closer to US$60pbl in 2018

• Supply side cap - OPEC signals production cut agreement could extend beyond March 2018. OPEC secretary general says OPEC members and other producers may have to take some "extraordinary measures" to ensure market in long term balance.
• US Inventory drawdown - Pace of inventory declines in 2017 is faster y-o-y. Unlike the last two years where year end inventory was higher than the starting number, US inventory levels are already down 14mmbbls nett till September and can only decline further hereon heading into winter months.

Brent crude heading for US$75pbl on the charts 

• Elliot wave count so far –
  1. Bear market ended in January 2016 at US$28pbl
  2. One-year rally (January 2016 to January 2017) from US$28pbl to US$57pbl is Wave A
  3. 6-month correction (January 2017 to June 2017) from US$57pbl down to US$45pbl is Wave B.
• Positive move triggered in September 2017 - Rise above US$52.8pbl in early September is a positive sign that Wave C rally has started.
• Wave-C objective US$75pbl in 2H18 –This is using Fibonacci extension technique. Resistance along the way at c.US$65.5pbl (38.2% upward retracement).
• Key support at USD52.5pbl – More sideways between USD45-53pbl in the event of its failure.

Prefer Big Cap Rigbuilders 

SembCorp Marine 

• Among the three yards, Sembcorp Marine is the most sensitive to oil price fluctuations and should react most positively if Brent indeed heads to US$65pbl or even US$75pbl by 2H18. Its recent sale of nine jackup rigs to Borr Drillling for c.US$1.3bn is testament to the rig market recovery. The sale improves its net gearing by 0.25x and eliminates a key overhang. 
• A potential merger among the Singapore yards can be an added catalyst for the stock. (See report: Shipyards - DBS Research 2017-07-20: Creating Global Champions)

SembCorp Industries

• SembCorp Industries’ 2017 profit is affected by startup losses at its SembcorpGayatri Power Ltd power plant and the “income loss” in China of c.S$40m following the expiry of its YangCheng power plant at the end of 2016. The marine division’s new orders should recover to c.S$2bn this year from the dismal S$320m last year. SCI could benefit from a re-rating of its utility business if any rationalisation of the three Singapore yards transforms it into a pure utility play.

It’s POSH or nothing for OSVs 

• The Offshore Support Vessels (OSV) market is decidedly off the bottom. Offshore working rig count has rebounded, mirrored by rising OSV utilisation. 
• PACC Offshore Services Holdings (POSH) will be a survivor that is poised to ride the upswing. It has no bonds outstanding, and has undrawn bank lines that provide more than sufficient cover for capex and working capital, positive OCF YTD in FY17, and strong parentage with high ownership of c.82% by majority shareholder Kuok (Singapore) Ltd, which makes it a potential privatisation candidate.
• Meanwhile, we see positive earnings momentum in 2H17/1H18 owing to the deployment of Semisubmersible Accommodation Vessel (SSAV) POSH Arcadia on the Shell Prelude FLNG project and deployment of six more newbuild OSVs to long-term contracts in the Middle East. 
• POSH is trading at 0.7x P/BV but it has made the largest impairments (c.32% of fleet value) vs. peers, so its equity base is more eroded. Thus, P/BV valuation looks inflated vs. peers, but is not.

(DBSV's most recent price target for Keppel Corp is S$7.60. See report: Keppel Corporation (KEP SP) - 2017-08-25: Breaks Into Jones Act Market)

Yeo Kee Yan CMT DBS Vickers | Pei Hwa HO DBS Vickers | Janice Chua DBS Vickers | http://www.dbsvickers.com/ 2017-10-13

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 7.600 Same 7.600

BUY Maintain BUY 4.000 Same 4.000

BUY Maintain BUY 2.300 Same 2.300

BUY Maintain BUY 0.410 Same 0.410