Offshore & Marine 2Q18 Preview - CGS-CIMB Research 2018-07-10: Stronger Qoq For Yangzijiang Shipbuilding, Hope For Dividend For Keppel Corp


Offshore & Marine 2Q18 Preview - Stronger Qoq For YZJ, Hope For Dividend For Keppel Corp

  • Yangzijiang Shipbuilding could be the only one in the sector to deliver stronger q-o-q earnings. Keppel Corp, Sembcorp Marine and Sembcorp Industries are likely to post weaker q-o-q earnings.
  • Keppel Corp could dish out a special 50th anniversary dividend on stronger balance sheet while Sembcorp Industries should see better utilities earnings with higher load factors in India.
  • Yangzijiang Shipbuilding should also see stronger q-o-q shipbuilding margin with the delivery of some 30 vessels in 2Q18 vs. 9 in 1Q18. There could be a positive impact from a weak Rmb.
  • Sembcorp Marine could see a net loss of c S$20m with little improvement in operating leverage.
  • Maintain sector Overweight as aggregate valuations are at c 1x CY18FP/BV or -1s.d of its 10-year mean vs. improving ROE of c. 7% . Orders are still the key catalysts. This report is shared at SGinvestors.io.

Slower pace of orders in 2Q18, cut our order forecasts for FY18F

  • After a surge in global offshore fields achieving Final Investment Decisions in 2017 (c. US$91bn), the pace slowed with 33 projects YTD (c. US$26bn) at smaller values. We blame this on keen competition, political risks and leaner cost structure among the operators.
  • Keppel O&M and Sembcorp Marine secured c. S$800-900m each in 2Q18 and YTD vs. our S$3bn target for 2018. We cut our order target to S$2bn each for 2018 to be more realistic in our expectations.

Keppel Corp: Stronger cash, Special dividend hope (results: 19 Jul)

  • Keppel Corp’s 2Q18 net profit will be lower q-o-q with c. S$90m of property gain vs. c. S$290m in 1Q18. O&M EBIT to remain steady q-o-q at 2-3%. No land sale in Tianjin Eco City in 2Q18 but Investments should be profitable form mark-to-market gains for KrisEnegy warrants.
  • Keppel Corp’s balance sheet to be boosted by c. US$460m from Borr Drilling (downpayment of recent rigs sale and delivery of 2nd novated Transocean rig). This could provide ammunition for special dividend (c.S$0.10-0.12).

Sembcorp Marine could be in the red (results: 20 Jul)

  • We expect Sembcorp Marine to deliver a net loss of c.S$20m, based on -1% EBIT margin. Management guided in 1Q18 of a possibility of negative operating profit if there are no major changes in order trend. We estimate order book to be about S$4.6bn by end-2Q18 (1Q18: S$4.59bn).
  • We think losses may not shock the market anymore but the focus will be on how fast Sembcorp Marine can clinch sizeable orders to improve yards’ utilisation and operating leverage. It is trading at c.1.7x CY18F P/BV, or -0.5 s.d of 5-year mean.

Sembcorp Industries: stronger India (results: 3 Aug)

  • We expect Sembcorp Industries to deliver a 2Q18 net profit of S$75m (-2% q-o-q, +35% y-o-y), after incorporating the loss in Sembcorp Marine. Utilities should see a stronger profit of S$83m (+18%,+8% y-o-y) on the back of a seasonally-stronger wind load factor in SGI. India should swing into the black (c.S$5m-7m).
  • Other contributing factors are higher plant load factors in SGPL (c.90%). China profit could slide q-o-q coming out of winter while Singapore and other countries should remain steady q-o-q.
  • Ex-SMM, its utilities business is trading at an undemanding valuation of 0.3x CY18F P/BV (-2 s.d since 2010) vs. ROE of 7%.

Yangzijiang’s stronger margins (results: 8 Aug)

  • We expect Yangzijiang Shipbuildings’ 2Q18F profit of c. Rmb720 (+20% q-o-q, flat y-o-y) with the delivery of +20 vessels. 
  • Shipbuilding margins could improve to c.20% (1Q18: 17%). HTM income could grow q-o-q with new portfolios renewed a higher yield. There could be some positive translation impact from depreciating Rmb. 
  • The stock is trading at trough valuations of 0.6x CY18F P/BV. Upside to earnings could come from provision write-back at end-18.

Slower pace of FIDs in 2018 after a surge in 2017

  • After two consecutive years of declining offshore projects in 2014-16, there were 97 projects sanctioned globally in 2017 amounting to capex of c. US$91bn. This represented an increase of c. 54% y-o-y in capex terms. So far in 2018, projects have reached Financial Investment Decision (FID) with a combined capex of c. US$26bn.
  • As of now, there are still c.US$145bn of projects globally that are scheduled to reach FID in 2018, mainly in the EPC or Front End Engineering Design (FEED) stage. From the newsflow that we have seen, we think the swinging of oil prices, noises of trade wars and leaner operating structure among the operators are the key reasons for slower projects FID and contract awards so far this year. This report is shared at SGinvestors.io.

Competition is keener…

  • Based on the projects that we tracked in which the Singapore yards were bidding since 2017, we saw keener competition with more Chinese names emerging in 2018. For instance, the hull for FPSO Liza 2 with production capacity of c. 220,000 bbl/d of oil is done by Shanghai Waigaoqiao Shipbuilding. The topside fabrication is now being eyed by at least seven Chinese yards, according to Upstream.
  • Note that the conversion of Liza 1 FPSO (production capacity of 120,000 bbl/d of oil) was done at Keppel O&M yard. We believe Shanghai Waigaoqiao was picked for the hull fabrication due to its cost advantage over Singapore yards.

… but all is not lost

  • The long-awaited Gravifloat project (c. US$1bn) for Chinese Poly-GCL is finally looking more hopeful, with a contract likely by end-2018. Poly-GCL gained approval for plans to build a link to carry gas from Ethiopian fields to a floating liquefaction facility for exports to China. This paves the way for a construction agreement by the end of 2018. According to Upstream, Poly-GCL and Sembcorp Marine have agreed to proceed with talks for an eventual engineering, procurement and construction (EPC) contract.
  • Other contracts in the pipeline include BP’s Tourtue platform, as well as Chevron’s Rosebank floater for which the Singapore and Korean yards are still bidding. This report is shared at SGinvestors.io.

Tapering our expectations for Singapore yards

  • Keppel O&M and Sembcorp Marine secured c. S$800m-900m contracts each in 2Q18 and YTD vs. our S$3bn target for 2018. To be more realistic, we cut our order targets to S$2bn each for 2018. Our expectations for S$3bn-3.5bn for 2019 remain unchanged for now.

Maintain Overweight, valuations at -1s.d of 10-year history

  • At c.1x CY18F P/BV, the sector is trading at an undemanding valuation of -1sd of its 10-year mean vs. improving ROE of c.7%. Sustained high oil prices and stronger balance sheet should limit the downside of the sector. Stronger orders could still be the key catalyst for the sector.
  • Yangzijiang Shipbuilding and Keppel Corp are our preferred picks. We like Yangzijiang Shipbuilding for its balance sheet, relatively stronger order momentum as well as its ability to preserve margins from lower cost of steel and Rmb depreciation. We like Keppel Corp for its clear asset recycling multi-business growth platforms. This report is shared at SGinvestors.io.

Company Reports

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-10
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