Morgan Stanley upgrades SembMarine to Overweight, turns positive on Singapore O&M

Singapore five-dollar note Photo by Leslie Shaffer

Morgan Stanley pointed to signs “green shoots” in Singapore’s offshore and marine sector were accelerating, with the order book recovery becoming more pronounced.

“Potential FPSO awards, semisub order recovery, execution of old orders after years of delay, asset sale upside, brisker hiring, and stabilizing rentals all point to acceleration in offshore recovery,” the investment bank said in a note last week.

Morgan Stanley raised its offshore order book estimates by 15 percent to around US$15 billion, with Singapore yards tipped to win an around 20 percent market share.

So far, the recovery is only partly priced in to the shares, it said.

Upgrading SembMarine to Overweight

It upgraded Sembcorp Marine to Overweight from Underweight and raised its target price to S$2.48 from S$1.48.

“We see SMM as a pure play to the order book recovery in offshore and marine, given its high operating leverage to sector recovery
and the low asset utilization,” Morgan Stanley said. “The upgrade is driven by increased order book clarity which supports a higher target
price-to-book multiple to 2.25 times. (earlier at 1.5 times). With equities outperforming a year before change in order book direction,
we believe the stock will outperform despite the projected losses in 2018.”

Additionally, it noted that SembMarine has shown it can win orders from the South Korean yards in offshore platforms.

Downbeat on Sembcorp Industries

But the bank kept Sembcorp Industries at Underweight, despite hiking its target price to S$2.77 from S$2.39 on the increased valuation for SembMarine.

“We see challenges to its India portfolio and rising tariff headwinds in China. While the Singapore gas utility business is turning around, the
oversupply in electricity will keep prices and margins low for its power generation portfolio,” the note said.

The bank also raised Keppel Corp.’s target price to S$9.45 from S$9.01, in part on a higher offshore and marine valuation, keeping an Overweight call.

Keppel’s O&M ‘near-free’

“We think an impending notice to begin work on FLNG Gandria,as mentioned by Ophir Energy and Golar and a harshwater rig award to Keppel by Awilco converting to order book should drive order book recovery,” it said. “Keppel has proven to be adept at winning
offshore rig and gas platform/carrier orders; we expect that to continue in 2018 and 2019.”

Morgan Stanley raised its new order win forecasts for Keppel by 24 percent and 25 percent for 2018 and 2019 respectively, although it noted that revenue recognition would be slow as the deliveries were longer dated. It cut its forecasts for Keppel’s offshore and marine earnings before interest, taxes, depreciation and amortization (EBITDA) by 9-12 percent for 2018-19 on the slower revenue recognition.

“However, we do not give Keppel any upside from sales of seven jackups which have still not been able to find buyers,” it said.

The bank also cut Keppel’s property EBITDA estimates on changes in the handover schedule of the property portfolio; it said that overall, that led to 2018-19 earnings per share forecasts being cut by 8-13 percent.

But it pointed to Keppel’s stock valuation: “The stock price implies that the pain of lower oil has been priced in with O&M now a
near-free ‘option.'”

Shares of Keppel ended Tuesday up 0.64 percent at S$7.83, Sembcorp Industries added 0.66 percent to S$3.07 and SembMarine fell 0.90 percent to S$2.21.