SINGAPORE (Dec 3): UOB-KayHian is maintaining its “market weight” recommendation on Singapore’s shipyards with Sembcorp Industries as its top pick.

In a report out today, analysts Nancy Wei and Vijay Natarajan say Singapore shipyard valuations have a direct correlation with oil prices.

In a rising oil price situation, share prices of Keppel Corp (Keppel) and Sembcorp Marine (SMM) would usually see a steep climb, buoyed by rising contract wins, and a PE or P/B valuation expansion.

Conversely, share price deflation can be equally steep, especially when Brent oil prices fall below US$80/bbl, note the analysts.

Following OPEC’s meeting last Thursday, selected OPEC members and industry experts expect Brent oil prices to hit a floor level of US$60-70/bbl for a while, before stabilising in the years ahead at US$80+/bbl.

The short-term weak oil prices should flush out high-cost oil production and thus return the oil market to an even demand-supply keel, say Wei and Vijay.

Based on a Brent oil price of US$60-70/bbl, UOB-KayHian’s adjusted regression analysis suggests SMM should be priced at a one-year forward PE of 9.5x.

Accordingly, the house is cutting its target price for SMM by 25% from $4.00 (2015F PE of 15x) to $3.00 (2016F PE of 9.5x). It has also rolled forward its valuation by one year.

Similarly, it has valued Keppel’s offshore & marine (O&M) business at 2016F PE of 9.5x and lowered its target price by 25% from $12.60 to $9.50 based on a revised SOTP valuation of $9.49/share.

As such, UOB-KayHian is maintaining its Hold valuation on SMM and downgrading Keppel from Buy to Hold. The house is also maintaining its Sell on Cosco Corp with a lower target price of $0.56.

“As for Sembcorp Industries (SCI), we maintain our Buy call, but cut our target price by 12% from $5.80 to $5.20 based on our new target price of $3 for SMM that yields a revised SOTP valuation of $5.21/share. SCI is the most resilient among the three stocks with half of its earnings derived from its utilities business,” conclude the analysts.

SCI, SMM, Keppel and Cosco are trading at $4.29, $2.95, $8.54 and 58 cents as at 2:13 p.m. local time.