SINGAPORE (March 14): Daiwa Capital Markets is maintaining its “hold” and “sell” calls on Keppel and SembCorp Marine respectively, saying optimism in the sector is unfounded.
Despite poor 4Q16 results, shares of Keppel and SembMarine have rallied by 10-25% year after their announcements.
However, Daiwa analyst Roystan Tan is maintaining a cautious outlook in its Monday report on the belief that earnings will continue to disappoint investors.
For one, the stabilisation of oil prices between US$50-60/bbl have partially been negated by increasing shale production that threatens to disrupt the balanced oil supply/demand.
Tan also worries about the lack of new order wins and continued weakness in the operating performance in the sector.
He believes Korean yards will remain the dominant force in the construction of floating production systems, with Singapore yards playing second fiddle through the conversion market.
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In 4Q16, Keppel announced a $270 million impairment related to the closure of five of its yards although that no impairments were made to SembMarine’s fixed assets and projects.
However, Tan says it is premature to conclude that earnings have bottomed in 2016, and unlike market expectations for an earnings improvement this year, he sees earnings pressure persisting through 2018 based on a tepid new-order win flow amid a rapidly declining order backlog.
“We believe investors should take the current rally as an opportunity to exit the sector, as current share prices appear to reflect the high expectations depicted in our bull-case scenario, which may not be realised,” says Tan who has a target price of $6.44 for Keppel and $1.22 for SembMarine.
As at 1.28pm, shares of Keppel and SembMarine are trading at $6.58 and $1.86 respectively.
