SINGAPORE (March 1): Credit Suisse is turning positive on Singapore’s offshore and marine (O&M) sector on expectations of a rerating from close-to-trough valuations.
This comes as oil prices have been stabilising above US$50/bbl with the research house’s proprietary tracker pointing to an inflection in the bidding pipeline for contracts in Feb this year.
With that, Credit Suisse's research team is upgrading its ratings on Keppel Corp and Sembcorp Marine to “outperform” with the respective target prices of $8.70 and $2.40.
In a Tuesday research report, analysts Gerald Wong and Shih Huar Kwang opine that Keppel O&M, a subsidiary of Keppel, is likely to see a boost in new orders in 2017, while the outlook of its property business has also improved.
SembMarine has also earned an upgrade due to anticipated improvements to its ship repair business with the introduction of the International Maritime Organisation regulation, which is due to take effect in Sept 2017.
Credit Swisse however remains “neutral” on Sembcorp Industries with a target price of $3.60 as the research team believes its utilities segment will remain under pressure due to losses incurred by the group’s power plant in India, Sembcorp Gayatri Power Limited.
“Based on our in-depth yard-by-yard cost structure analysis, we expect O&M earnings to trough above market expectations due to significant headcount cuts. Balance sheet concerns should also ease with lower working requirements,” say the analysts.
“We expect any progress on Sete Brasil's restructuring to be positive for Singapore yards, which have made provisions totalling $559 million for Sete units. For non-Sete units, we estimate the worst-case scenario for potential writedowns to be manageable based on current balance sheet positions,” they add.
Credit Swisse also expects a recovery in new orders for production units in 2017, with about 29 projects to potentially lead to contract awards within the next 18 months.
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“While the drilling rig market continues to face oversupply challenges, operators have noted increasing tendering and contracting activity in the rig market," say Wong and Kwang.
As at 4.16pm, shares of Keppel, SembMarine and Semcorp Industries are trading at $7.11, $1.91 and $3.28 respectively.
