Offshore & Marine

Kim Eng on 17 May 2012

Mixed bag of results. Offshore & Marine (O&M) related stocks under our coverage reported a mixed bag of first-quarter results. Although there are some variances from our expectations, this has not changed our views on the sector. Our top picks to ride the O&M cycle are the bellwether stocks namely Keppel Corp (Keppel) and Sembcorp Marine (SMM). We also like Sembcorp Industries (SCI) for its increasingly resilient Utilities segment. Ezion, a smaller-market-cap stock stands out with strong expected 3-year EPS CAGR of over 35%. We are less sanguine on the Chinese shipbuilders such as Cosco and Yangzijiang. We also took the opportunity to adjust our forecasts and valuations for Keppel (Page 4).

Positive on the rig-builders. Our preference for the rig-builders is based on the premise of heightened Exploration & Production (E&P) activities by the oil majors. Taken together, capital spending is also expected to rise by 10% YoY in 2012. This should open the tap for a flow of new rig and offshore contract orders. Our optimism is further supported by high oil prices, structural requirements for higher specification and safer rigs, rig-replacement cycle of aging fleet and signs of higher charter and utilisation rates. Anecdotal evidence also suggests that enquiry pipelines for new rig and offshore contracts are healthy across all categories.

Negative on the shipbuilders. We remain negative on the Chinese shipbuilders given macro headwinds surrounding the shipbuilding sector which we believe will persist for 2012. We expect demand for new dry-bulk carriers to be weak due to oversupply and lower iron-ore trade. The containership newbuild segment has a less negative outlook, supported by shippers seeking more efficient vessels in order to enhance cost leadership in the long term, but this would only be possible for ship owners with strong financials. Overall, newbuild prices are expected to remain depressed with sustained margin pressures.

Risks from a global recession. We are mindful of the risk of the global economy plunging into a recession which will affect the credit markets. Oil companies could postpone their spending plans in the event that oil prices dip below USD80/bbl, but we think that this scenario is unlikely.

Order flow key driver. Order flow is the key stock price driver in the coming months and would serve to confirm our views on the sector. Both Keppel and SMM have good earnings visibility supported by their strong orderbooks. For Cosco and Yangzijiang, we expect the negative sector-related factors discussed above to take precedence and weigh down on the duo’s performance.