Offshore & Marine Sector 2020 Outlook & Strategy - DBS Research 2019-12-12: Slow Uptick, Keen Competition

Offshore & Marine Sector 2020 Outlook & Strategy - DBS Research | SGinvestors.io YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6) SEMBCORP INDUSTRIES LTD (SGX:U96) SEMBCORP MARINE LTD (SGX:S51)

Offshore & Marine Sector 2020 Outlook & Strategy - Slow Uptick, Keen Competition

  • Brent crude oil prices expected to average US$60- 65/bbl in 2020, similar to 2019 levels.
  • Order books running low, stronger contract wins momentum required to re-rate shipyards.
  • Asset owners improving utilisations but day rate hike possible beyond 2020.
  • Selective BUYs: Yangzijiang Shipbuilding (Target Price S$1.68), Sembcorp Industries (Target Price S$2.90).

Shipyards: Order wins momentum remains disappointing

YANGZIJIANG SHIPBUILDING (SGX:BS6) (BUY, Target Price S$1.68) - good buying opportunity; underappreciated near trough of 0.6x P/Bv and net cash level of S$1/share.

  • As the largest and most cost-efficient private shipbuilder in China, Yangzijiang Shipbuilding is well-positioned to ride the sector consolidation and shipbuilding recovery. Its strategy to move up into the liquefied natural gas/ liquefied petroleum gas (LNG/LPG) vessel segment through partnership with Mitsui strengthens the longer-term prospects of the yard. In addition, it is also a beneficiary of a stronger US Dollar (USD).
  • Yangzijiang Shipbuilding has a solid balance sheet, sitting on net cash of S$1 per share (includes investments), representing ~65% of net tangible asset (NTA). It offers a steady dividend yield of ~4-5%.
  • Share prices are set to spike if its Chairman returns from a leave of absence. The correction from S$1.50 levels over fears of the Chairman’s assistance in investigations, which are non-shipyard related, seem overdone.
  • See Yangzijiang Share Price; Yangzijiang Target Price; Yangzijiang Analyst Reports; Yangzijiang Dividend History; Yangzijiang Announcements; Yangzijiang Latest News.

SEMBCORP INDUSTRIES (SGX:U96) (BUY, Target Price S$2.90) is a safer proxy for O&M exposure.

SEMBCORP MARINE (SGX:S51) (HOLD, Target Price S$1.40) awaits big orders to flow through.

  • Contract flows YTD have disappointed for the second year in a row, with Sembcorp Marine securing only S$845m orders. This was lower than last year’s S$1.2bn and a far cry from breakeven order levels of ~S$2bn, which the market was expecting in early 2019. While we are hopeful of a stronger recovery in 2020, supported by steady oil prices and capital expenditure (capex) increases, leading to conclusion of project Final Investment Decisions (FIDs) that were pushed back the past 2-years, we need more evidence before turning positive again on the counter.
  • Potential sizeable contracts are expected to come largely from production platforms and LNG related products. The long-awaited settlement with Sete in October 2019 to complete and deliver the first two rigs could also result in accretions to order book.
  • On the yard merger front, we think it is premature to gauge the impact on Sembcorp Marine without any details on potential restructuring, which may only take place after 6-12 months at least.
  • See Sembcorp Marine Share Price; Sembcorp Marine Target Price; Sembcorp Marine Analyst Reports; Sembcorp Marine Dividend History; Sembcorp Marine Announcements; Sembcorp Marine Latest News.

Macro View – Oil prices to remain range-bound; service sector has bottomed but recovery seems gradual

OPEC+ deal to establish a US$60/bbl floor; oil prices should continue trading sideways on neutral supply-demand dynamics.

  • While we are now slightly more positive on crude oil prices, we still maintain our 2020/2021 average Brent crude oil price forecast of US$60-65/bbl, near the current level, as global crude oil supply and demand growth in 2020 will be largely balanced. Lower OPEC+ supply will be offset by considerable supply growth from other sources like the US, Norway and Brazil.
  • On the demand front, while a more promising macroeconomic outlook is expected to underpin a pick-up in growth to 1.0mmbpd in 2020 (up from 0.8mmbpd in 2019E), it will be barely adequate to absorb the 0.8-10mmbpd increase in global supply.
  • Upside in oil prices from here on will be limited unless there is better-than-expected OPEC+ compliance, faster roll-back of US- China tariffs or escalation of geopolitical tension in the Middle East.

Singapore’s rigbuilders: Diversification to non-drilling solutions could drive order recovery.

  • Both yards have made a breakthrough into high-value non-crude solutions ( > US$200m each) and this has brightened the order outlook. While order flow of Singapore’s rigbuilders, in particular Sembcorp Marine, has been rather disappointing YTD hovering at 2017’s ~S$3bn range, we expect a recovery to ~S$6-7bn in 2020, stemming from production platforms and LNG related products.

Visible signs of life in selected Asian offshore markets, but recovery continues to be gradual.

  • Upstream capital spending in the region has been trending up as per our initial estimates (2019E: +12-15% y-o-y), and is expected to grow by another 8-10% in 2020. Asset-class wise, the jack-up market in particular is leading the pack, with average jack-up total utilisation expected to hit around 73% in 2019 (65% in 2018). Similarly, total utilisation of offshore support vessels (OSVs) will improve to around 58-60% in 2019 (51-53% in 2018), partly constrained by the return of cold-stacked vessels into the market.
  • Going into 2020, although we anticipate a moderate uptick in jack-up day rates owing to favourable demand-supply dynamics, day rate improvement for OSVs will likely be hindered by stiff competition amongst OSV service providers, who are actively looking to put their vessels to work.

Shipbuilding recovery underway.

  • The overall conventional shipping market is expected to resume its recovery, after removal of uncertainties from the International Maritime Organisation 2020 (IMO 2020) regulations. Global order book-to-fleet ratio has dropped to a low of less than 10%, implying moderating new supply going forward. LNG carriers are the brightest spot, followed by tankers, bulkers and containerships.

Risks & Catalysts

Lower oil prices.

  • A bear scenario of lower oil prices in the event of higher than expected supply and lower than expected demand growth, would defer any uptick in oil company spending, and derail a recovery in the services and newbuilding sectors.

Execution risk is salient for shipyards.

  • As Singapore’s rigbuilders diversify their order books away from the drilling rig market (e.g. Sembcorp Marine’s modularised LNG terminals), execution of the fabrication of new product types will be crucial for margins and earnings.

Pei Hwa HO DBS Group Research | Suvro SARKAR DBS Research | Jason SUM DBS Research | https://www.dbsvickers.com/ 2019-12-12
SGX Stock Analyst Report BUY MAINTAIN BUY 1.680 SAME 1.680