Upgrade SMM to OW.
All boats to float with order book: SMM has corrected ~25% from its YTD high
on 5 Feb 2018 (the STI is flat over that period) after reporting an EBITDA loss for
the first time in 15 years last quarter with cautious management outlook. With
earnings, order book, and margins hitting cycle lows, we believe most negatives
are now well flagged. However, the inflection from new orders and sale of
nearly complete assets (20% of book) will be key to the equity story. Stocks
tend to outperform 12 months before order book growth (as seen in earlier
cycles, Exhibit 2), which we expect in 2019.
Confidence in positive FCF generation and profitability will drive equity
performance. Hence, despite projected losses in 2018, we upgrade SMM to OW
as the most levered play on the broadening offshore upcycle. We also raise our
price target for Keppel to incorporate our higher order book forecasts.
Order book recovery gets more pronounced: We raise estimates on the offshore
order book 15%, to ~US$15bn, with Singapore yards winning ~20% market share.
Oil majors '2018 capex outlook is mostly flattish, but the ~2x inflection in FCF
and 25% rise in new projects are early signs of capex growth.
Five points sum up the green shoot acceleration (see Exhibit 11):
1) BP (oil major)
is starting up six major projects and making final decisions on new projects;
SBM Offshore saw higher probability of the bull case getting real for demand of
floating production units;
3) Transocean (operator) feels strongly that harshwater
rigs will be an early beneficiary of the offshore recovery, which is in the
4) Golar has confidence in floating LNG as work begins in Keppel's
shipyard (after about a four-year delay).
5) Petrobras is honoring use of four rigs
from contractors, after four years of challenges.
An interesting divergence
(similar to spot oil price and forward curve) is in management commentary of oil
producers, asset operators, and contractors – they are more constructive, while
yards are more cautious.
Inflection in confirmed orders in 2018: After three years or dwindling new
orders, we expect Singapore yards to get US$3bn in new orders (i.e.,about half
way to mid-cycle) from floating production units and the gas value chain as they
raise market share – a trend we saw more pronounced YTD.
Isn't the recovery priced in? Only partly: We see Singapore yards recovering to
18-20% midcycle ROE by 2021 as utilization rates rise with order book and asset
sales (as asset rentals rise) help reduce current drag on returns. (Read Report)
Source : Morgan Stanley Research
Offshore and Marine - Green Shoots Accelerate
Shared By Stock Fanatic on Monday, March 26, 2018 | 26.3.18
Posted on Monday, March 26, 2018 |
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