Global order wins have trickled to a
halt, as we had flagged in our
Singapore Rigbuilders Sector
initiation report of 2 February 2015.
While record-high orderbooks might
provide temporary insulation
against major earnings declines, we
expect the rigbuilders under our
coverage to feel the heat as their
backlogs are depleted. Also, we are
seeing lower day-rates and
utilisation rates across all Mobile
Offshore Drilling Unit (MODUs)
classes, which we think could be a
prelude to lower newbuild prices.
This low order-win environment,
coupled with potential price
declines, will negatively impact the
rigbuilders’ margins/profitability in
the next 1-2 years, in our view.
■ What's the impact
Oil companies cutting capex
aggressively. Various international
and national oil companies (IOCs,
NOCs) have announced 10-40% YoY
capex cuts for 2015E as
shareholders’ pressure mounts and
they place greater emphasis on cash
conservation in the weak oil-price
environment. The impact has
trickled down to shipyards, with
only 1 new MODU order placed globally in 2015. This precarious
situation is compounded by the
existing construction backlog, with a
flurry of new equipment (rigs,
floaters, OSVs) expected to hit the
market in 2015-16.
expected. Clients are deferring
taking delivery of orders, an
expected scenario given a weak
charter market. This eases the
pressure for owners to sign contracts
at less than ideal day-rates.
Although such a move by asset
owners/operators helps alleviate the
oversupply situation, the burden
now falls on yards, with additional
maintenance and storage expenses
eating into operational profitability.
We trim 2015-
17E earnings for Keppel by 2-3%,
SembMarine by 5-9%, and Cosco by
7-17% based on:
1) the lower-than-originally
2) tapering our
expectations for newbuild prices,
given our belief that rate weaknesses
(both charter and utilisation) will
prompt asset owners to decide
against paying current market prices
for newbuild assets.
revisions feed through to 3-9% cuts
in our 12-month target prices for
Keppel, SembMarine and Cosco.
■ What we recommend
We remain Negative on the sector as
we foresee no catalysts for a rerating
in the next 12 months. Hence, we
stick with our Hold (3) rating on
Keppel, Underperform (4) on
SembMarine and Sell (5) on Cosco. We continue to prefer Keppel over
SembMarine given the latter’s 100%
exposure to the declining Oil & Gas
(O&G) industry, while Keppel, by
virtue of its conglomerate structure,
will likely ride out this industry
downturn in better shape.
Although we maintain our Negative
stance on the sector, we continue to
advocate a long-Keppel, short SembMarine
strategy to investors
seeking exposure to this industry.
This strategy would have generated
gross returns of some 7%/4%/-1%
horizons, respectively (based on 11th
June closing prices).
We believe Cosco faces the greatest
risk of order cancellations, as most
of its orders were placed without
firm contracts from oil companies.
■ How we differ
We expect order wins and operating
margins to fall short of the market’s
over the next 12 months. (Read Report)
Source : Daiwa Capital Markets
Labels: Cosco Corp, Keppel Corp, Offshore Marine Sector, Sembcorp Marine