Monday, 25 August 2014

Shipyard- Different strategies, diverging fortunes

UOBKayhian on 25 Aug 2014

Globally, lower rig orders. After roaring rig orders in 2011-13, less rig orders are placed in 2014. Ytd, we have seen total orders for 27 drilling rigs (2013: 104) globally, comprising 18 jack-ups (2013: 80), 5 semis (2013: 8), 4 drillships (2013: 15) and 0 tender rigs (2013: 1). Of these, Singapore rig builders have secured 6 jack-ups (33% market share) and 2 drillships (50% market share) but no semis. Rig orders are significantly lower in 2014.

But Singapore shipyards’ contract wins remain healthy. Keppel Corp’s (Keppel) O&M contract wins in 1H14 totalled S$3.2b (of which S$1.3b were secured in 2Q14). Net orderbook as at end-June 14 was S$14.1b (1Q14: 14.4b) with earnings visibility extending to 2019. As for Sembcorp Marine (SMM), it won new contracts worth S$2.5b ytd. SMM currently has a net orderbook of S$12.7b (1Q14: S$12.9b), also with completion and deliveries stretching into 2019. We maintain our contract win projections of S$7b p.a. for 2014-16 for Keppel, and S$4b for 2014 and S$5b each for 2015 and 2016 for SMM.

SMM’s conservative accounting prevails. SMM is undertaking the building of nine drillships with progressive deliveries between 2Q15 and 2019. Two drillships are under construction and SMM is already recognising revenue from these two drillships. However, it continues to adopt a conservative accounting towards profit recognition. Profit from the first unit will be assessed upon its completion. While the experience garnered from the construction of the first unit will have some bearing on the profit accounting of the second unit (and henceforth), overall, management will remain prudent in profit recognition in the building of the nine drillships. We reckon the full impact of these drillships on SMM’s margins will be felt by 1H15 when first revenue recognition is achieved for the fourth unit. In the meantime, share price will remain range-bound. Construction on Estaleiro Jurong Aracruz, SMM’s wholly-owned shipyard in Brazil, continues to progress well and the yard remains on track to commerce initial operations in 2H14.

For Keppel, going global is an effective competitive strategy, given the proliferation of local content requirements in major oil-producing markets. Keppel has more than 20 shipyards globally. It has signed an agreement with China’s Titan Petrochemicals Group (TPG) and Titan Quanzhou Shipyard (TQS) to manage the TQS shipyard. Commodity- trading SOE-conglomerate Guangdong Zhenrong Energy (GDZR) is a major shareholder of TPG. TQS is wholly-owned by TPG which is a provider of
logistics, transportation, distribution and marine services for petrochemical products in Asia. TQS will only build rigs and offshore vessels according to Keppel's proprietary designs. This is an opportunity to populate Chinese waters with Keppel's proprietary designs (>20).

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