KEPPEL CORPORATION LIMITED (SGX:BN4)
YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)
SEMBCORP MARINE LTD (SGX:S51)
CSE GLOBAL LTD (SGX:544)
Capital Goods - OVERWEIGHT
Positive catalysts to look out for
Orders stronger than expected.
- So far, KEPPEL CORPORATION LIMITED (SGX:BN4) has fared better relative to SEMBCORP MARINE LTD (SGX:S51) in order momentum, with close to S$1.75bn of YTD orders won from both semisubmersibles and renewable energy projects. Keppel Corp's share price has not fully reflected these orders given the US-China trade war jitters, in our view.
- ST ENGINEERING (SGX:S63) also announced impressive sizeable orders of more than S$3bn in 1Q19, although execution will take up to five years for some projects.
Settlement of Sete Brasil rigs.
- The binary outcome is either Keppel Corp or Magni Partners (Borr Drilling’s shareholders) winning the order for two or four semi-submersibles from Sete Brasil. If Keppel Corp wins the construction and chartering of two rigs, it removes inventory risks. If Magni Partners wins the charter of four rigs, we believe both Keppel Corp and Sembcorp Marine stand a chance of negotiating for contracts to complete two rigs each.
Domestic M&As gaining traction.
- BAKER TECHNOLOGY LIMITED (SGX:BTP) acquired c.52% of CH OFFSHORE LTD (SGX:C13) in Jul 2018. In Apr 2019, EZION HOLDINGS LIMITED (SGX:5ME) announced that Yinson Bhd (YNS MK) has proposed to acquire at least 70% of Ezion via a debt-swap involving US$900m. We see the increasing domestic acquisitions as a sign that regional players are increasingly anticipating a sector recovery.
- Again, such consolidations will shrink the industry and give oilfield service players more clout when it comes to bidding for contract awards.
Negative catalysts to fear
Oil prices retreat.
- The yards will take a beating if oil prices retreat, crossing below the psychological levels of US$60/bbl or US$50/bbl. Any swing in decisions due to political risks in OPEC or US production could cause market jitters.
Large-scale project awards and spending standstill amidst US-China trade war.
- Although viewed as defensive, the awarding of sizeable government projects may also pause in the midst of uncertainty. To this end, we think smart city/cyber security projects momentum for ST Engineering could be affected in the short term.
Ripple effect of trade tariffs on margins.
- ST Engineering generates c.25% of its revenue from its US subsidiaries. We think there could be a mild ripple effect on margins in the medium term on spare parts and equipment used for aircraft maintenance, construction vehicles, commercial vehicles and offshore vessels.
Risk of earnings cuts in the next 2 quarters? YES
- Sembcorp Marine and YANGZIJIANG SHIPBUILDING (SGX:BS6)’s orders could disappoint.
- YTD, Sembcorp Marine has only clinched S$175m vs. our S$2bn order forecast for 2019F. Similarly, Yangzijiang Shipbuilding also won US$116m, well short of management’s original full-year target of US$2bn. Earnings for FY20F could be impacted if orders do not pick up in the next two quarters for both yards.
- ST Engineering’s integration costs and research & development costs on new prototypes could also post some earnings risks.
Stock preference: Keppel Corp and CSE the most preferred, YZJ the least
- We stay Overweight on the sector as it is not expensive, trading at an average of 14x 12M forward P/E and below -1 s.d. of 10-year mean in terms of P/BV. This could have factored in the lower ROE expected from the sector since the oil price crash.
- Keppel Corp is our top pick for the sector. It is trading at undemanding valuations of 11x FY19F P/E, below its 10-year average of 12x as well as 0.9x FY19F P/BV or below -1 s.d. (1.1x). Relative to 4Q18, the company has progressed positively by successfully acquiring M1 LIMITED (SGX:B2F) and taking KEPPEL TELE & TRAN (SGX:K11) private as well as making further provisions for Sete Brasil semi-submersibles, signalling resolution of delivering/selling the rig is closer. The worst for offshore and marine (O&M) earnings softness is also over, with the company intending to hire more staff in view of stronger orders ahead.
- Our least preferred is Yangzijiang Shipbuilding as we have recently downgraded this stock to Hold from Add after it appreciated 27% over Jan-Apr 2019, in line with the A-share index. The stock is now trading slightly above its 5-year mean of 1.02x P/BV. We would revisit our valuation once orders show strong signs of picking up. See report: Yangzijiang Shipbuilding - Enjoying Strong Trading Income Like A Bank.
- Within the small-cap space, we still like CSE GLOBAL LTD (SGX:544) for the continued improvement in its infrastructure and oil and gas businesses in FY19F, its net cash position (end-1Q19 net cash of S$34.8m), and DPS of 2.75 Scts p.a.
- Beyond that, there are also some net cash companies which are profitable, i.e. PENGUIN INTERNATIONAL LIMITED (SGX:BTM), which the market may gravitate to during a sector upcycle, in our view. See initiation report: Penguin International Ltd - Happy Fleet.
See also
LIM Siew Khee
CGS-CIMB Research
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Cezzane SEE
CGS-CIMB Research
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https://research.itradecimb.com/
2019-05-21
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