CFA Society Singapore
SINGAPORE (Dec 21): DBS Group Research is keeping its “neutral” stance on the offshore and marine sector amid a slow pick up in new orders.
“The overall conventional shipping market is expected to remain on a recovery path, albeit gradual,” says lead analyst Ho Pei Hwa in a 2019 outlook and strategy report.
Ho notes that global orderbook-to-fleet ratio has dropped to a low of less than 10%, implying moderating new supply going forward. However, demand growth is also expected to slow down given lower GDP growth and trade tensions.
“Against this backdrop, we expect shipbuilding consolidation to continue and the market to improve with moderate uptick in orders,” Ho says.
DBS’ top picks to ride the O&M recovery are Sembcorp Marine, Sembcorp Industries, and Yangzijiang Shipbuilding.
Of the three, Ho says Sembmarine is most leveraged to O&M recovery and remains the preferred proxy as a pure play to ride the recovery.
DBS has a “buy” call on Sembmarine with a target price of $2.40.
According to Ho, Sembmarine has sizeable new orders expected for non-drilling solutions with close to $3 billion in the potential order pipeline, while the reactivation of Sete’s projects should remove a key overhang.
In addition, Ho says Sembmarine is a potential M&A play arising from a consolidation of Singapore yards.
Shares in Sembmarine closed 1 cent lower at $1.55 on Friday.
Meanwhile, DBS sees Sembcorp Industries as a safer proxy for O&M exposure.
The research house has a “buy” call on Sembcorp Industries with a target price of $3.70.
“Sembcorp Industries (SCI) offers a unique value proposition as a proxy to ride the cyclical O&M upturn, supported by a defensive utilities business,” says Ho. “Assuming our fair value for [Sembcorp Marine] at $2.40, SCI’s Utilities segment is way undervalued at 0.37x P/BV and 4.4x PE against 6% ROE.”
In addition, Ho believe continuous improvements in India will re-rate SCI’s Utilities business.
Shares in Sembcorp Industries closed at $2.54 on Friday.
At the same time, Ho says “Yangzijiang is well-positioned to ride the sector consolidation and shipbuilding recovery… [as] the largest and most cost efficient private shipbuilder in China.”
DBS has a “buy” call on Yangzijiang with a target price of $1.82.
According to Ho, Yanzijiang has a solid balance sheet and offers a steady dividend yield of approximately 4%.
“Its strategy to move up into the LNG/LPG vessel segment through partnership with Mitsui strengthens the longer-term prospects of the yard,” Ho says.
Shares in Yangzijiang closed 2 cents higher at $1.23 on Friday.