Offshore & Marine (O&M): Overweight
By DMG Research
With general strengthening in commodity markets and global equities rally, oil prices have climbed 70% from the Feb lows. We believe crude oil price will trend higher, driven by OPEC production cuts and signs of recovery of consumer demand. In addition, the US stress-test results, released two weeks ago, was more benign than expected and ascertained the US banks' increased lending capacity. These improved changes in the fundamental outlook should augur well for the O&M sector recovery.
The oil industry takes a long-term view on its investments, given that it takes years to develop the oil fields. The previous months of capex cuts had led to a slowdown in exploration & production (E&P) activities, which in turn, resulted in a deflationary drilling cost environment.
A low cost environment encourages more drilling. As such, we believe this may mark the start of
another secular growth cycle, as new orders start to flow, especially for the capacity-constrained
production floating systems.
We believe the yards, which are highly leveraged to the cycle, with proven track records, competitive edge and strong balance sheets, will be able to garner these new contracts. Hence, we have raised our new order assumptions to S$3.0b and S$3.5b for Keppel Corp (Keppel) for FY09 and FY10 respectively. Sembcorp Marine (SCM)'s new orders are S$2.0b for FY09 and S$3.0b for FY10.
We have pegged the Singapore yards to P/E of 16x (in-line with the industry's historical average) on FY10F EPS, and the Chinese yards to P/E of 12x on FY10F EPS.
Our target prices are raised by 1-52%. While both Keppel and SCM have outperformed the STI (+29%) year-to-date, we believe that there is further upside, especially from secular earnings growth and strong new order momentum. We also note that both Keppel and SCM are currently trading at undemanding valuations (as compared to average historical P/E), even after the recent price rebound.
Key risks to our more optimistic investment thesis include a sharp downward reversal in oil price and weaker-than-expected economic recovery.
Cosco Corp (NEUTRAL\Target price S$1.14)
Keppel Corp (BUY\ Target price S$7.96)
Sembcorp Marine (BUY\ Target price S$3.04)
Disclaimer
This research is for general distribution. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report. The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice. This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities, DMGAPS and its affiliates, their directors, connected person and employees may from time to time have interest and/or underwriting commitment in the securities mentioned in this report.
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