Singapore Offshore & Marine

DMG & Partners Research on 23 May 2012

Stocks tumbled but offshore spending outlook looks good. Rising risk of a European crisis and lower oil prices have lead to steep decline in share prices of Singapore Offshore & Marine (O&M) and Chinese shipbuilding stocks. While market conditions are somewhat cloudier compared to three months ago, we remain positive on the O&M sector as the drivers for the sector are still positive: (1) tight availability of rigs in the market due to rising demand and fleet renewal; (2) financing has improved for established clients, although not for speculators. We expect Singapore offshore rig builders to add more new orders and enhance their revenue visibility, which now extends up to 2015 and beyond. Our preferred big-cap pick is now Sembcorp Industries (SCI) given twin catalysts from offshore marine and steady earnings growth from Utilities. We also like Ezion Holdings, a midcap stock.

O&M margins moderating but not unexpected. Keppel’s record 1Q12 earnings of S$751m (+141% YoY), beat estimates on property earnings while SMM posted a below-consensus 1Q12 net profit of S$113m (-25% YoY) on lower margins. Keppel O&M’s operating margins of 15.1% was above SMM’s margins of 12.8% and at the top end of management’s near-term guidance of 12-15%.
SMM is targeting around 15% operating margins in FY12.

Negative on Chinese shipbuilding but upgrade YZJ to Neutral on valuation. Since we downgrade YZJ to Sell on 21 Feb 2012, the stock has declined 27%. Following the sharp fall, we now raise YZJ to Neutral with an unchanged TP of S$1.04. Downside will be supported by its strong balance sheet and 5.8% yield. We remain negative on the Chinese commercial shipbuilding sector
as we expect margin compression due to aggressive bid for new jobs to fill shipyard capacity.
Key risks to our view: (1) oil prices falling and sustaining below investment hurdle rate; and (2) pullback of financing for rig owners and vessel owners.