SINGAPORE (Oct 27): Credit Suisse is maintaining its “overweight” recommendation of Singapore’s Offshore & Marine sector on improving outlook and following Keppel's 3Q earnings surprise.

In a Thursday report, analyst Gerald Wong expects Sembcorp Marine's operating margin to remain firm compared to that of 4.3% in 2Q17.

In addition, net gearing should be reduced from 1.31 times in June to about 1.25 times, following collection of proceeds of about $220 million from the sale of Cosco Shipyard Group, with scope to decline further in 4Q17 with US$500 million ($684 million) downpayment collected for sale of nine jackups to Borr Drilling.

“We expect management to continue to highlight encouraging enquiries for non-drilling solutions with the improvement in tendering activity in recent months,” says Wong.

Upstream recently reported that SembMarine has been selected as the preferred bidder for a Shell Vito production semisub. The yard is also well positioned to win construction packages for Maersk's Tyra gas hub, with both likely to be awarded in early 2018. The LOI for two compressed gas liquid carriers could also be finalised in the coming months.

Credit Suisse has a “neutral” on SembMarine with $2.40 target. The stock is trading 1 cent higher at $1.86 or 48 times FY17 earnings.

Although profit for Sembcorp Industries should improve, Wong says the market is likely to focus on the outcome of the strategic review, which will not be announced together with the 3Q17 results.

The analyst expects a q-o-q improvement in utilities net profit in 3Q17, driven by improved performance in India with lower interest expense as well as higher plant load factors (PLF) and spot prices.

Sembcorp could also write back part of $16 million provision previously taken for Jurong Aromatic Corp (JAC), following resumption of operations in end June.

Credit Suisse has a “neutral” on Sembcorp with $3.60 target price. The stock is trading 3 cents higher at $3.30 or 14 times FY17 earnings.

As for Yangzijiang, the house says shipbuilding gross margins should remain healthy at close to 20% in 3Q17, as an increase in vessels delivered offset higher steel costs.

Net profit should be boosted by divestment gain from sale of two 92,500 DWT dry bulk carriers and a tax refund.

However, following US$832 million of new orders announced in 7M17, contract momentum appears to have slowed down since August.

According to Clarksons, Yangzijiang secured four bulk carriers from Angelakos in August and two 180,000 dwt bulk carriers from Mosvold Shipping. However, it lost a tender for six VLOCs from ICBC Financial Leasing to Beihai Shipbuilding.

As such, Wong expects management to maintain its 2017 new order target of US$1.5 billion.

Credit Suisse has a “neutral” on Yangzijiang with $1.50 target. The stock is trading 1 cent lower at $1.52 or 10.6 times FY17 earnings.