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Offshore & marine sector

Singapore offshore and marine plays likely range bound, despite recent robust contract wins, says Credit Suisse; reiterates Underweight call on sector. Broker says year-to-date contract wins for Keppel Corp, SembMarine met 55%, 74%, respectively, of broker's FY08 forecast. But says longer delivery cycle could mean realized revenues could still disappoint, "despite strong outlook for newbuild demand, revenue and earnings growth rates for Singapore yards are likely to slow down due to increasing competition and system capacity constraints." Adds, "trading valuations may stay in range in the absence of the prospect for a significant earnings revision." Maintains Neutral rating on SembMarine with $4.70 target, Underperform rating on Keppel Corp with $10.30 target.

 

Keppel Corp fell, bucking modest gains by other blue chips, as sentiment still bogged down by uncertainty over EUR140 m contract from Norwegian client MPU Offshore Lift, which is filing for bankruptcy in Norway. "The timing of this piece of news is really unfortunate as it comes right after news of its dispute with Fred Olsen over the Blackford Dolphin conversion. However this event really should be one-off," says UBS, which retains Buy call, $15.00 target. Morgan Stanley, which has Equalweight rating with $12.50 target, says rival Sembcorp Marine is better bet; "of these 2 S'pore yards, we prefer SMM, which has a lower percentage of customers using new unproven designs as compared to Keppel."

 

Rio Tinto's move to charge Chinese steel makers up to 96.5% more for iron ore will further raise costs for steel mills, lead to more margin pressure for Singapore-listed Chinese shipyards, says DBS Vickers.

"SGX-listed Chinese shipyards ... will need to grapple with expected margin pressure on their 4-5 year order backlog that are secured at lower newbuild prices in the 2006-07 periods."

Expects effect of higher steel prices to set in for projects starting after April 2008. Suggests switching out of Chinese shipyards, staying with Singapore-based peers such as SembMarine, ASL Marine, Jaya. But remains positive on Cosco, noting its bigger ship repair and offshore construction activities expected to more than offset exposure to shipbuilding business.

BHP Billiton widely expected to follow Rio's move, although company says it hasn't settled iron ore contracts with its Asian customers.

 

Citigroup remains Overweight on Singapore conglomerates, saying visibility in O&M sector starting to improve on recent contract wins. "The E&P cycle has yet to run its full course as it progresses from shallow to deepwater exploration and subsequently, production activities." Expects cycle won''t peak for another 2-3 years. Notes, over past month, news flow turned positive with series of orders for drilling equipment, including Keppel announcing new orders worth $2.0 b, SembCorp Marine announcing $1.5 b worth of new orders. Says optimistic FY08 orders can meet house''s assumptions, may surprise on upside. Says other key catalysts may come from current cycle statistics appearing better than previous cycle peak, possibility Brazil's local content requirements won't be strictly enforced given tight yard capacity, and if margin concerns are overdone.

 

The Petrobras rig building boom may not be as positive for Singapore offshore & marine plays as some hope, says Credit Suisse. Broker has confirmed identity of Petrobras' 12 charters, says 8 of the 12 are for drill ships, a market in which Singapore yards have not been competitive historically. Says, "while we fully expect Singapore yards to win more contracts, we believe expectations are running ahead of fundamentals at this stage." Says Korean yards have already won 2 of the 8 drill ship contracts, are frontrunners for remaining 6. Adds growing competition, product substitution risks also a worry. Maintains Underweight call on Singapore offshore & marine sector.