Offshore & Marine Small / Mid-Caps - CIMB Research 2018-01-12: See You After 1H18

Offshore & Marine Small / Mid-Caps - CIMB Research 2018-01-12: See You After 1H18 Singapore Stocks Offshore Marine Stocks Small Caps Stocks Mid Caps Stocks MERMAID MARITIME PUBLIC CO LTD DU4.SI CSE GLOBAL LTD 544.SI EZION HOLDINGS LIMITED 5ME.SI PACIFIC RADIANCE LTD. T8V.SI

Offshore & Marine Small / Mid-Caps - See You After 1H18

  • Despite the disparity in the valuations of small/mid-caps (0.36x CY18F P/BV) vs. large caps (1.3x CY18F P/BV), we think it is still not time to pile up on the former.
  • More housekeeping ahead, with some potentially dragging past 1H18: 
  • CSE Global stands out for its net cash position but its 14x CY18F P/E valuation is stretched, with uncertainty in core earnings recovery in FY18F. We advocate profit taking.
  • Our preferred picks are still the big caps – Sembcorp Marine (SMM) and Keppel Corporation (KEP). Order win and stronger oil price are still the sector's potential re-rating catalysts.

2017 a year to forget 

Small/mid-cap Armageddon 

  • In 2017, small and mid cap offshore oilfield stocks underperformed the STI significantly. Most underwent financial restructuring, and some have thus far been suspended from trading or delisted (Ezion, Ezra, Nam Cheong, Triyards).
  • Overall, it could be considered a “watershed” year for the small/mid-cap stocks.

Looking forward 

Small/mid cap valuations undemanding; but timing is key 

  • Overall small/mid-cap segment is still trading at aggregate P/BV trough valuations of 0.36x CY18F P/BV vs. large cap peers that are trading at close to 1.3x CY18F P/BV, having risen in tandem with crude oil prices. 
  • Looking back to the two previous downturns, we note that small/ mid-cap stocks will typically emerge as out-performers in the long run, providing scope for tactical trades. However, we believe clearer entry points will emerge after 1H18 once the ‘housekeeping’ (i.e. impairment/ refinancing) exercises are completed, providing better visibility on earnings growth.

More losses in 4Q17F 

  • We expect an uninspiring 4Q17F for the small/ mid-cap segment. Among stocks under our coverage, 
    1. CSE Global mentioned that it intends to review the fair value of its business units and viability of its accounts receivables, which we read as could result in impairments and provisions.
    2. For Mermaid Maritime, we understand that a fair bit of the work that had been delayed in 3Q17 would be performed in 4Q17. However, all eyes will be on its outlook for FY18F, and that it has last guided to be slow.
    3. Ezion is still in the midst of its financial restructuring and hence is still suspended from trading.
    4. Pacific Radiance (PACRA) could continue to see losses as offshore vessels’ rates, whilst stabilised, have yet to pick up.

Underlying dynamics remain 

  • Post our sector upgrade report in Nov 17 - “Offshore & Marine - Shake off them blues; Go Overweight”, underlying sector dynamics are holding out. 
  • The WTI/Brent has spiked to US$61.7/US$68.1 per barrel, way ahead of the average US$50.9/US$54.4/bbl seen in 2017. Average OPEC production in 2017 was 32.4m bbls/day, in line with the ceiling of 32.5m bbls/day it set in Jan-16.

CSE Global and Mermaid Maritime perceived as “safe” stocks, but the timing is not ripe 

  • Within our coverage, CSE Global and Mermaid Maritime (MMT) are the ‘safer’ bets due to their stronger balance sheets (CSE will remain net cash in FY17-18F, in our view; Mermaid Maritime was slight net cash position of US$0.01 as at 9M17). However, 
    1. CSE Global is already trading at 14.1x CY18F and 11.8x CY19F P/Es, at 9-year average, but its 12M forward earnings are still below average net profit of S$30m since 2009. Moreover, impact of its near-term “housekeeping exercises”guided for 4Q17 (to be announced in Feb 18) also pose near-term uncertainties. Hence, we view that the risk/rewards are skewed to the downside for now. 
    2. For Mermaid Maritime, the impending Seadrill restructuring could put a cap on sentiment.
  • Beyond our coverage, PACC Offshore Services Holdings (POSH, Not Rated) could be a bellwether for the offshore marine stocks given that companies like Ezion and PACRA are still in “scrubbing” mode. We note that POSH currently trades at 0.74x P/BV, close to its 4-year +0.5 s.d. level of 0.79x.   

CSE Global (Rating: REDUCE; Target Price: S$0.31). 

  • We believe the market has already priced in an earnings recovery to its average mean since 2009, but CY18-19F earnings are still short of that due to weak large-scale contracts and margin compression. 
  • We ascribed a CY19F P/E of 10x, c. -1s.d of 5-year mean as we expect FY19F net profits and GP margins (GPM) to be below 9-year average of c.S$30m and c.30%, respectively.
  • See report: CSE Global - CIMB Research 2018-01-12: Valuations Ahead Of Earnings

Ezion (Suspended Trading; Last Call: REDUCE; Target Price: S$0.13) 

  • Ezion Holdings has had a tumultuous 2017. With its operations struggling, it called for a debt reform exercise, and was suspended from trading on 14 Aug 2017. A consent solicitation exercise was completed in Nov 17 and post negotiations with secured bank lenders, an extraordinary general meeting (EGM) will be held before the trading suspension is lifted.
  • Assuming full conversion of all bonds/perps/warrants, the guided illustrative number of shares could expand to c.6.6bn shares (vs. 2.1bn currently).
  • Management mentioned the possibility of impairments with an indicative range of US$500m-900m (as per CSE circular). Our last call was REDUCE, with a Target Price of S$0.13 based on CY17F P/BV of 0.15x. 
  • See report: Ezion Holdings - CIMB Research 2018-01-12: Resuscitation Attempts Ongoing

Mermaid Maritime (MMT) (Upgrade to HOLD, from Reduce; Target Price: S$0.142)

  • Its current valuation of FY18F P/BV of 0.4x implies the market has priced in the potential write-off of its investment in Asian Offshore Drilling (AOD). Downside risks are capped for now, in our view. 
  • Mermaid Maritime guided for closure to the Seadrill issue in Jan 18. But we note that a disclosure hearing expected to be conducted by Seadrill on 10 Jan was delayed to 1 Feb; this could shift the guided timeline for the closure. 
  • Mermaid Maritime  is a potential M&A or privatisation target, in our view. Our Target Price of S$0.142 is based on CY18F 0.43x P/BV (1 s.d. below 5-year average mean).
  • See report: Mermaid Maritime - CIMB Research 2018-01-12: Awaiting Seadrill Plans But Downside Largely Capped

PACRA (Rating: Reduce; Target Price: S$0.07 ) 

  • Pacific Radiance (PACRA) closed Sep 17 with narrower net losses of c.US37.1m for 9M17 (vs. core net loss of US$37.1m in 9M16) on the back of better cost controls, but times remain tough for the company. 
  • During its 3Q17 results presentation, it mentioned that for the next 12 months, it would still be vulnerable to the threat of oil price pullback and charter rates staying low due to oversupply. 
  • It recently announced that it will be convening its 2nd informal meeting with its note-holders in Jan 18. It gave no timeline for the potential completion of this capital structure reform, but judging by the next steps of peers like Ezion, informal meetings are typically followed by a consent solicitation exercises.
  • See report: Pacific Radiance - CIMB Research 2018-01-12: Cleaning Up Mode

PACC Offshore Services Holdings (POSH) (Non Rated) 

  • PACC Offshore Services Holdings (POSH) is an offshore marine company with a diversified fleet servicing offshore oil & gas exploration and production activities. It has four segments: offshore supply vessels, transportation and installation, offshore accommodation and harbour services, and emergency response. 
  • According to POSH, as at Sep 17, the POSH Group (including its joint ventures) operated a combined fleet of 124 vessels with another five vessels on order. Thus far, the market has deemed it safe as it has no impending bond default issue and also has strong parentage as it is 81.89% owned by Kuok (Singapore) Ltd
  • In 2017, the stock gained 7.8%, and YTD it has risen by another 4.3%. Currently, it is trading at 0.71x P/BV, close to its +0.5 s.d. level of 0.79x.

Risks and potential catalysts 

Potential re-rating catalysts 

  1. Swifter-than-expected recovery in crude oil prices, 
  2. Instability in one or more of the Organization of the Petroleum Exporting Countries (OPEC) member states, thus reducing OPEC production, and 
  3. Higher-than-expected global GDP growth that will lift demand.

Downside risks 

  1. OPEC renegading on abandoning its production ceiling anytime in 2018; 
  2. Higher-than-expected US production that would undermine market rebalancing efforts 
  3. Delays to expected project sanctions in 2018F.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-01-12
CIMB Research SGX Stock Analyst Report HOLD Upgrade REDUCE 0.142 Up 0.140
REDUCE Maintain REDUCE 0.310 Same 0.310
REDUCE Maintain REDUCE 0.130 Same 0.130
REDUCE Maintain REDUCE 0.073 Same 0.073