Offshore & Marine

Kim Eng on 21 Nov 2012

Time for re-entry. The third quarter was generally a disappointing one for the offshore & marine (O&M) stocks under our coverage. Several delivered lower-than-expected results while the others posted at best in-line performance. Sembcorp Marine’s (SMM) share price was hard hit following another weak quarter, but the real concern was potentially lower future profitability. While we remain negative on shipbuilders, we
believe the margin concerns besetting the rigbuilders were overamplified. The recent sell-down thus offers an attractive opportunity for re-entry.

Revenue growth intact for players exposed to offshore O&G. We see no major risks to topline growth for companies exposed to the offshore oil and gas sector (Keppel, SMM, SCI, Ezion) as activities remain robust with a healthy order enquiry pipeline. We expect order win momentum to be sustained. Recent notable contract wins include a USD295.2m accommodation semi-submersible order for SMM and a
potential FLNG conversion project to be contracted to Keppel by Golar LNG. The latter could be worth up to USD500-600m.

Rigbuilders are over-penalised. Expectations on rigbuilders now hinge more on margins than topline growth, given the current record orderbook levels. Operating margins have been expected to trend downwards from the above-20% level seen in 2010/2011. At 13-14% currently, we think that they are more stabilised and we see scope for margin recovery from tight yard utilisation, stable prices, execution of repeat orders and better product mix. For SMM, more conversion and ship repair jobs when its new yard facility becomes operational would also drive overall margin improvement. We believe that the market was impatient, as it did not see any significant turnaround in margins in 3Q12, and has over-penalised the rigbuilders on execution risks.

Still no ray of hope for shipbuilders. For the shipbuilders, profitable order wins are increasingly hard to come, thus impeding orderbook replenishment and putting FY14F earnings at risk. Expect to see more
bankruptcies in smaller shipyards to flush out excess capacity before we see a sustainable recovery in the sector.

Where the bright spots are. Ezion continues to deliver, bolstered by fresh contract wins and corporate developments that would allow it to take on more projects. Sembcorp Industries’ (SCI) utilities segment took the lead as its marine segment faltered. At current valuations, the former is only trading at about 6.3x PER, severely undervalued relative to peers.

Actions for stocks in the sector. We believe that current price levels are right for picking up the rigbuilders. We continue to prefer SMM for its pure-play exposure to the rig-building cycle, while SCI and Keppel
would offer downside protection from their other businesses. Reiterate BUY on Keppel, SMM, SCI and Ezion. Maintain HOLD on Yangzijiang and SELL on Cosco.