KEPPEL CORPORATION LIMITED (SGX:BN4)
SEMBCORP INDUSTRIES LTD (SGX:U96)
SEMBCORP MARINE LTD (SGX:S51)
YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)
Offshore & Marine Stocks 1H21 Results Preview - Industry Conditions Improving, Albeit At A Snail’s Pace
- Since our last sector update in mid Mar 21, global rig utilisation and day rates have largely improved, albeit slowly. The Brent forward oil price for Dec 25 has risen 22% year-to-date to US$59.67/bbl which could lead to increased offshore capex. We also note that as offshore wind gains importance, Singapore’s yards may yet play a more active role in building out the infrastructure.
- For now, we maintain MARKET WEIGHT on the sector and have BUY ratings on Sembcorp Industries (SGX:U96), Yangzijiang Shipbuilding (SGX:BS6) and Keppel Corporation (SGX:BN4).
WHAT’S NEW
Green shoots growing slowly.
- Since their troughs in Nov 20, the number of active offshore rigs as well as competitive utilisation have continued their recovery. While utilisation rates for jack-ups have stagnated this year, utilisation for semi-subs and drillships have risen 8-24% year-to-date while dayrates for jack-ups and mid-water semis have increased by 15% and 22% year-to-date respectively. While we caution that a few months’ worth of data points may not point to anything meaningful at present, the short term trend is nevertheless positive.
Industry activity looking to pick up.
- While demand for new drilling rigs will likely continue to be weak, demand for production assets could recover after experiencing capex delays related to COVID-19 in 2020. According to Sembcorp Marine (SGX:S51), a number of major offshore production projects will likely head towards Final Investment Decision in 2H21 and thus both Keppel Corporation (SGX:BN4) and Sembcorp Marine could benefit.
Oil price – US$100/bbl sooner than expected?
- In Mar 21, we had raised the possibility that oil prices could hit US$100/bbl in the next two years as a result of the lack of exploration capex in the past five years. This could happen even sooner with the recent OPEC+ meeting without any agreement on increasing oil supplies to the market. Thus, any incremental oil supply can only happen after the August OPEC meeting, and a stronger oil price would be well supported in the near term, with small cap upstream stocks such as Rex International (SGX:5WH) and RH PetroGas (SGX:T13) being potential beneficiaries.
- See also previous report: Singapore Small-Mid Cap Stock Strategy - UOB Kay Hian 2021-06-15: Beneficiaries Of Higher Oil Prices.
ACTION
Maintain MARKET WEIGHT on the sector.
- Should activity in the oil & gas industry strengthen, leading to a revival in the offshore marine industry, we could see a cyclical upturn start in the next 6-12 months. This assumes that the current second or third waves of COVID-19 infections globally are dealt with in a reasonably quick manner, and the global vaccine roll-out is effective.
With the exception of Sembcorp Marine, we believe that the industrial stocks in our universe present compelling investment cases:
- Sembcorp Industries (SGX:U96) with its plans to significantly grow its renewables over the next 3-5 years thus attracting interest from ESG investors,
- Yangzijiang Shipbuilding (SGX:BS6) given our belief that it will benefit from continued strong new order flow in 2021 and potentially into 2022, and
- Keppel Corporation due to the positive sentiment surrounding the merger of its offshore marine segment with Sembcorp Marine.
ESSENTIALS
Promising outlook for potential oil demand recovery.
- The roll-out of various vaccines over the past six months should allow for global oil demand to recover in 2021. Already, oil prices have trended upwards towards US$80/bbl, a level that was unimaginable at the start of 2021. Clearly this has been helped by OPEC+ which to date has retained its tight grip on oil supplies, with an eye on supporting higher prices, and its own fiscal balances.
Oil demand to rebound in 2021.
- At the start of 2020, oil demand had been expected to grow by 1-3%. However, COVID-19 significantly affected energy demand, erasing nearly 9mmbpd of oil demand globally in 2020. However, with expectations of a global economic recovery in 2021, the US Energy Information Administration (EIA) expects crude oil and liquids demand to experience a v-shaped rebound in 2021 with oil demand rising by 5.4mmbpd followed by another strong year in 2022 with a growing demand of 3.65mmpd.
Inactive rigs – Incrementally less of a hurdle.
- If we look at the data from Jun 21 vs Oct 20, inactive rigs as a percentage of total rigs have continued to come down, especially for drillships which saw the largest decline in June vs March.
- In 2021 year-to-date, 37 rigs have been taken out of the market (equivalent to ~4% of the global competitive rig fleet). Of the 37, 21 were converted to non-drilling applications, three were to be converted to other uses and only two were sold to other drilling companies. In addition, a total of 13 rigs were sold to the scrapyard. Anecdotally, rigs have also been deployed for other uses such as offshore renewable projects or even launching rockets into space.
- See report attached below for complete analysis and data charts.
1H21 RESULTS PREVIEW
Keppel Corporation (SGX:BN4):
- In 1H21, we forecast that Keppel Corporation will generate S$3.4b in revenue (+7% y-o-y) and S$270m in net profit before exceptional items (1H20: -S$537m). Recall that the company stated on 8 Jun 21 that it will recognise a loss of S$318m in respect of its exposures to KrisEnergy in its 1H21 financial results which will be offset by a S$187 equity gain arising from the sale of its stake in Floatel.
- Key issues to look out for: contribution from the new Marina East desalination plant, dividend payout, comments on progress of O&M divestment, and China property outlook.
- See Keppel Corp Share Price; Keppel Corp Target Price; Keppel Corp Analyst Reports; Keppel Corp Dividend History; Keppel Corp Announcements; Keppel Corp Latest News.
Sembcorp Industries (SGX:U96):
- We forecast revenue of S$2.9b in 1H21 (+11% y-o-y) and net profit before exceptional items of S$170m (-4% y-o-y). Key issues to look out for: divestment plans for its thermal assets, floating solar plant startup in 3Q21, dividend payout, progress on ROE expansion and debt levels.
- See Sembcorp Share Price; Sembcorp Target Price; Sembcorp Analyst Reports; Sembcorp Dividend History; Sembcorp Announcements; Sembcorp Latest News.
Sembcorp Marine (SGX:S51):
- In our view, the market will focus less on the company’s results but instead look for any comments on progress of the merger with Keppel O&M. Post the recent US$175m win for modification works for an FPSO in Brazil, we would also keep an eye out for comments regarding potential order wins over the next 12 months.
- See Sembcorp Marine Share Price; Sembcorp Marine Target Price; Sembcorp Marine Analyst Reports; Sembcorp Marine Dividend History; Sembcorp Marine Announcements; Sembcorp Marine Latest News.
Yangzijiang Shipbuilding (SGX:BS6):
- We forecast that Yangzijiang Shipbuilding will generate revenue of RMB5.4b in 2Q21 (+12% y-o-y) and net profit of RMB745m (-4% y-o-y). While we remain positive on the company’s shipbuilding business with gross-profit margins likely to expand q-o-q and y-o-y, there is less certainty around the company’s trading business which experienced soft conditions in 1Q21.
- With its share price currently stalled at S$1.40-1.45 levels, we believe that Yangzijiang Shipbuilding (SGX:BS6) needs to keep winning new orders in both its traditional containership segment as well as new segments such as LPG carriers and to continue its expansion into dual-fuel containerships.
- See Yangzijiang Share Price; Yangzijiang Target Price; Yangzijiang Analyst Reports; Yangzijiang Dividend History; Yangzijiang Announcements; Yangzijiang Latest News.
Adrian LOH
UOB Kay Hian Research
|
https://research.uobkayhian.com/
2021-07-07
SGX Stock
Analyst Report
6.370
SAME
6.370
2.590
SAME
2.590
0.124
SAME
0.124
1.90
UP
1.760
