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UOB Kay Hian sees Sembcorp, Yangzijiang and Keppel as 'compelling investment cases' in offshore & marine sector

Felicia Tan
Felicia Tan7/8/2021 11:18 PM GMT+08  • 4 min read
UOB Kay Hian sees Sembcorp, Yangzijiang and Keppel as 'compelling investment cases' in offshore & marine sector
Within the sector, Loh has kept “buy” on Sembcorp, Yangzijiang Shipbuilding and Keppel Corporation and "hold" on SembMarine.
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UOB Kay Hian analyst Adrian Loh has maintained “market weight” on the offshore & marine sector, following his previous sector update in mid-March.

Since then, the sector has continued its recovery amid improving industry conditions, albeit at a snail’s pace.

“Since their troughs in November 2020, the number of active offshore rigs as well as competitive utilisation have continued their recovery,” Loh writes in a July 7 report.

“While utilisation rates for jack-ups have stagnated this year, utilisation for semi-subs and drillships have risen 8-24% year-to-date (y-t-d) while dayrates for jack-ups and mid-water semis have increased by 15% and 22% y-t-d respectively.”

That said, a few months’ worth of data may not point to anything meaningful at the moment, Loh cautions, although the short-term trend is looking positive.

Activity within the industry is also picking up as demand for production assets could recover after experiencing capital expenditure (capex) delays related to Covid-19 in 2020.

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“According to Sembcorp Marine (SembMarine), a number of major offshore production projects will likely head towards Final Investment Decision in 2HFY2021 and thus both Keppel Corporation and SembMarine could benefit,” says Loh.

Following the recent OPEC+ meeting, where no agreement on increasing oil supplies to the market was reached upon, oil prices could hit US$100 ($134.78) per barrel sooner than expected.

In March, Loh had raised the possibility of reaching US$100 a barrel in the next two years due to the lack of exploration capex in the past five years.

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However, with the results from the recent OPEC+ meeting, Loh says any incremental oil supply can happen only after the next meeting in August.

“A stronger oil price would be well supported in the near term,” he writes.

On this, small cap upstream stocks such as Rex International and RH Petrogras may be potential beneficiaries from the situation.

Looking ahead, Loh says investors could see a cyclical upturn start in the next six to 12 months, should activity in the oil and gas industry strengthen and lead to a revival in the offshore & marine industry.

This is based on the assumption that the current waves of Covid-19 infections are dealt with “in a reasonably quick manner” and that the global vaccine roll out is effective.

“Already, oil prices have trended upwards towards US$80 per barrel, a level that was unimaginable at the start of 2021. Clearly this has been helped by OPEC+ which to date has retained its tight grip on oil supplies, with an eye on supporting higher prices, and its own fiscal balances,” he says.

Demand for oil is also expected to rebound in 2021, on the back of expectations of an economic recovery.

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“The US Energy Information Administration (EIA) expects crude oil and liquids demand to experience a v-shaped rebound in 2021 with oil demand rising by 5.4 million barrels per day (mmbpd) followed by another strong year in 2022 with a growing demand of 3.65mmpd.”

Within the sector, Loh has kept “buy” on Sembcorp Industries, Yangzijiang Shipbuilding and Keppel Corporation with target prices of $2.59, $1.90 and $6.37 respectively.

He has maintained “hold” on SembMarine with a target price of 12.4 cents.

“With the exception of SembMarine, we believe that the industrial stocks in our universe present compelling investment cases: a) Sembcorp Industries with its plans to significantly grow its renewables over the next three to five years thus attracting interest from ESG investors, b) Yangzijiang (YZJ) given our belief that it will benefit from continued strong new order flow in 2021 and potentially into 2022, and c) Keppel due to the positive sentiment surrounding the merger of its offshore & marine segment with SembMarine,” he says.

Shares in Sembcorp, Yangzijiang and Keppel closed $2.13, $1.40 and $5.21 respectively, representing P/Bs of 1.1 times, 0.8 times and 0.9 times, according to UOB Kay Hian’s estimates.

Shares in SembMarine closed 12.2 cents, or 0.4 times P/B.

Photo: Bloomberg

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