SINGAPORE (Aug 25): Morgan Stanley Research has initiated coverage on Singapore’s offshore marine and utility segment with two “underweight” ratings and one “equal weight” call.
In its ASEAN Energy & Utilities report released on Thursday, the Morgan Stanley research team says while it believes Singapore’s shipyards will benefit from bigger order books resulting from the rising global gas glut, it has yet to see any significant competitive edge that can help the industry drive order book growth above the research house’s base case.
“Even though there has been a lot of focus on the gas value chain and power plants for both Sembcorp group and Keppel, the oversupplied electricity markets in Asia offer limited opportunities to grow this more expensive solution compared to renewables and on-land gas based power plants,” explains the research team.
“Outside Asia, for developing continents like Africa, the challenges of regulations, transmission infrastructure and the ability to pay may crowd out offshore power solutions,” it adds.
Morgan Stanley is of the view that while Singapore’s industry players have highlighted their intentions to redirect their businesses away from oil and towards gas, investors have not fully appreciated the challenges involved.
These include oversupplied regional and local markets which could put pressure on asset values as renewables increase market share, or from declining marginal costs as they continue to pressure electricity tariffs.
As such, the research house is estimating returns and earnings for the segment to decline by a 37% CAGR from 2017-2020 as the industry adapts to the “new normal” in the years ahead.
Sembcorp Industries (SCI) has been started at “underweight” with a target price of $2.39 as it is seen by the research house as a commodity play rather than a utility play.
The stock is currently trading at an implied price-to-book ratio of 0.55 times Morgan Stanley’s FY18 estimates with about 6% return on equity (ROE), which the research team believes is unattractive, considering the company’s returns remain below the estimated cost of capital.
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Sembcorp Marine (SMM), too, has been rated “underweight” with a price target estimate of $1.05.
Morgan Stanley expects the company to report profit over losses for the next three years as its order book shrinks, whereas consensus expects a recovery in its order book and modest profits. The research house is also an anticipating steady disruption in SMM’s business model due to the structural oversupply in the offshore rig market, as it believes stock prices are reflecting only a cyclical weakness.
Meanwhile, Keppel Corporation gets an “equal weight” rating and a price target of $6.18, on the notion that the group’s top-tier property land bank and improved balance sheet will help it recalibrate to the new challenges in the offshore & marine (O&M) business in the medium-term.
“While [Keppel] may face the same industry headwinds in the O&M business, its current order book coupled with repairs and maintenance jobs leads us to expect earnings to trough in 2017 before rising in 2018,” notes the team.
“With the stock pricing in near zero value for its O&M business assuming a 20% holding company (holdco) discount and 35% NAV discount to property business, we believe a lot of negatives are priced in (unlike at SMM),” it adds.
As at 3.54pm, shares in SCI, SMM and Keppel are trading at $3.04, $1.61 and $6.35 respectively.
