SINGAPORE (Dec 7): UOB Kay Hian is upgrading its view on Singapore’s shipyard sector to “market weight”, following the latest deal announced by Organization of the Petroleum Exporting Countries (OPEC), which raises oil prices and lifts hope of a rebound in 2017.
However, the research house expects oil companies to only raise capex in 2018 at the earliest. In the near-term, a gradual rather than sudden recovery is expected for contract awards.
“Production orders take centre stage, but these orders were roughly a quarter of total orders Singapore shipyards had secured in the last cycle,” observe analysts Foo Zhi Wei and Andrew Chow in a Wednesday report.
“Singapore yards had prospered on the rig contracting boom in the last cycle. Prospects remain post the oil bust, but the outlook is less prosperous. A shift to production contracts will float earnings, though we expect annual contract wins to shrink by >50% from peak levels,” they elaborate.
As a result, UOB has identified Sembcorp Industries (SCI) as the “safest proxy to the protracted sector recovery”, giving it a “buy” rating with a target price of $3.20. This makes SCI the only stock with a “buy” rating under the research house’s coverage of stocks within Singapore’s troubled oil and gas (O&G) sector.
“SCI remains our preferred pick namely for its growing earnings from India and proxy upside to oil prices via 61%-owned SMM,” explain Foo and Chow.
The research house maintains its “hold” calls on Keppel Corporation and Sembcorp Marine (SMM) at target prices of S$6.25 and S$1.40 respectively — noting that the former is currently facing headwinds owing to developments in China and Vietnam, the latter faces challenges in securing orders due to its highly-levered balance sheet.
“Fundamentally, the [O&G sector] environment remains largely unchanged. The recovery in activity will lag oil prices as oil players will require price stability before committing to higher activity levels. Meanwhile, earnings will remain weak and companies will require a strong balance sheet to survive till the eventual recovery,” add the analysts.
As at 12:55pm, shares of Sembcorp Industries were down by 1 Singaporean cent at S$2.91, while Keppel Corporation was trading 0.34% lower at S$5.88. Shares of SMM were flat at S$1.46.