Capital Goods Sector 2020 Outlook - RHB Invest 2019-12-19: Strong Recovery In Earnings Growth

Capital Goods Sector 2020 Outlook - RHB Invest | SGinvestors.io KEPPEL CORPORATION LIMITED (SGX:BN4) SINGAPORE TECH ENGINEERING LTD (SGX:S63)

Capital Goods Sector 2020 Outlook - Strong Recovery In Earnings Growth

  • OVERWEIGHT on sector, especially on offshore & marine (O&M) stocks. Reiterate BUY on all three SGX-listed large-cap O&M companies, with KEPPEL CORPORATION (SGX:BN4) as the top O&M pick. Among other companies in the sector, ST ENGINEERING (SGX:S63) is our preferred pick.
  • For Keppel Corporation, the re-rating catalyst is Temasek's partial share offer, which is also a precursor to an impending business restructuring, particularly of its O&M arm.
  • For ST Engineering, earnings contributions from recently-completed acquisitions and continued strong order wins are key re-rating catalysts.

Growing orderbook across the sector.

  • Keppel Corporation’s O&M business has secured SGD1.9bn worth of orders in 2019 (ahead of 12M18’s SGD1.7bn), with LNG and renewable-related projects accounting for c.60% of order wins. Keppel Corporation has an outstanding O&M orderbook of SGD5.1bn (vs. end-Dec 2018’s SGD4.3bn).
  • YTD, SEMBCORP MARINE (SGX:S51) has won new contracts worth SGD845m (+16% y-o-y). We expect the ramp-up in O&M orders to be sustained in 2020, on the expected stability in crude oil prices. Keppel Corporation and Sembcorp Marine's settlement agreements with Sete Brasil also pave the way for construction completion of some rigs/drill ships.
  • With order wins worth SGD5.4bn in 9M19 (2018: SGD5.2bn), ST Engineering has amassed outstanding orders worth SGD15.9bn, which is an all-time high. This provides revenue visibility of 2.5 years.

Keppel Corp should see growth from non-O&M segments.

ST Engineering should deliver an outperformance in 2020.

Key risks

  • Key risks for O&M companies are geopolitical uncertainties that could slow the recovery for the global O&M sector.
  • Key downside risks for ST Engineering include failure to sustain its current rate of strong order wins, an increase in MRAS and Newtec integration costs, and lower-than-estimated contributions from recently-completed acquisitions.

SOP valuation for Keppel Corp and blended valuation for ST Engineering.

Leng Seng Choon CFA RHB Securities Research | Shekhar Jaiswal RHB Invest | https://www.rhbinvest.com.sg/ 2019-12-19
SGX Stock Analyst Report BUY MAINTAIN BUY 7.800 SAME 7.800