Offshore and marine sector

DMG & Partners on 9 Oct2012

WE believe small/mid-cap offshore and marine (O&M) and oil and gas (O&G) stocks could continue a strong outperformance against the big-caps as investors look to rotate into smaller cap plays with attractive valuations.

We like companies with strong growth profile, a track record in delivering profits and managements with substantial stake in the company. In order of preference, our top three small/mid-cap picks are Ezion Holdings (BUY; TP: $2.02), Nam Cheong Holdings (BUY; TP: $0.29) and Technics Oil & Gas (BUY; TP: $1.28). Our top small/mid-cap picks are trading at 25 to 50 per cent discount to P/E valuations (FY13 forecast) for big-caps.

Nine of the top 10 gainers in the last three months were stocks with market cap of less than $1.5 billion, rising 10 to 40 per cent. Our top small/mid-cap picks, Ezion, Nam Cheong and Technics, have surged 40 per cent, 18 per cent and 10 per cent respectively, and we expect these stocks to continue their re-rating on strong earnings growth, and higher investors' interest in the smaller cap space. We expect Ezion and Nam Cheong to announce record quarterly core net profits in their upcoming Q3 2012 results.

We expect rig builders to deliver operating margins of 13 to 14 per cent, lower than Q3 2011 margins of 26.0 per cent for Keppel and 16.2 per cent for SMM [Sembcorp Marine] but flat q-o-q . . . Avoid Chinese shipyards with heavy exposure to the commercial (drybulk, containership) shipbuilding due to excess shipbuilding capacity, pressure on margins for new orders and deteriorating earnings visibility.