Offshore and Marine Sector

Phillip Securities Research, Aug 26

THERE was a mixed bag of results in the second quarter.

Keppel Corp's results were mostly in-line; earnings were down y-o-y mainly due to drop in revenue recognition from sales of Reflections @ Keppel Bay and lower volume of work in its Offshore & Marine (O&M) segment, partially offset by growth in Infrastructure and solid O&M margins. Sembcorp Marine's results were slightly below expectations due to conservative recognition for new design rigs and lower revenue recognition. Ezion's results were solid driven by new projects contributions and steady margin. Ezra's results were disappointing as its subsea segment continues to be a drag due to delays in project execution and additional unexpected costs recognition for certain projects.

Albeit the fundamentals for the O&M sector remains strong, management from both Keppel Corp and Sembcorp Marine sees that competition from the Chinese and Korean yards is beginning to intensify and may put pressure on margins. That said, we think that downside risks to Singapore yards are limited in the near and medium term, due to better pricing secured. Indeed, Singapore yards have managed to raise pricing by about 14-21 per cent for their proprietary designs over the past two years, even though their Chinese peers have aggressively entered the offshore market with lower pricing and attractive payment terms.

We continue to like Keppel Corp ("accumulate", target price: S$12.25) for its stronger operating performance, better execution for its Brazilian projects and attractive dividend yield of 4.6 per cent.

Ezion ("accumulate", target price: S$2.71) is also a strong performer within the small/mid cap space, with good business model and high earnings growth visibility, via its SEU (self-elevating units) fleet expansion with firm contracts already secured.

Albeit Sembcorp Marine's ("neutral", target price: S$4.42) order book spike of 150 per cent last year will see higher revenue growth over the next few years, we continue to see downward pressure for its margin due to recognition for new design rigs, which tend to be conservative at the initial stage, and higher costs on its new yards in Singapore and Brazil. Ezra ("neutral", target price: S$1.00) faces challenging subsea execution issues which may continue to be a drag on margins for the next few quarters.