Singapore’s shipyards order book fell more than 50 percent in 2016 as compared to 2015 – a plunge from $19 billion to $8 billion. That might change soon, though, according to UOB Kay Hian’s (UOBKH) report dated 29 May 2017.

Demand for jack-up rigs used for drilling oil offshore is improving, which bodes well for Singapore shipbuilders. Nevertheless, we might see different recovery timeframes in respective sub-segments.

“High-spec rigs will likely see a recovery first, and the large backlog in global yards means that yards will continue to face inventory risks on their undelivered premium rigs”, wrote UOBKH analysts.

High-specification rigs to lead recovery

Looking at the jack-up rig transactions since 16 May 2017, most purchases from shipyards are high-specification units followed by premium units. With that in mind, high-specification units are expected to lead the recovery and demand will slowly trickle down to the lower-specification units.

Slow pick-up nonetheless

Nevertheless, UOBKH forecasts a slow and gradual pick up in the next 12 months. UOBKH explained that the effects of the stabilising oil prices would take some time to alleviate pressure on the rig market.

As such, we shouldn’t see a significant turnaround in the Singapore shipyards sector even as the unsold rig inventories situation improves. “Balance sheets will remain stretched for a longer period”, wrote UOBKH analysts.

We can expect no new rig orders until 2020; production orders will be the most shipyards should expect for now. Therefore, investors should be ready for lacklustre earnings from shipyards. Turnaround is only likely after clients award new rig orders.

UOBKH prefers Keppel Corporation (SGX: BN4) over Sembcorp Marine (SGX: S51)

UOBKH looks at Sembcorp Industries (SGX: U96) as a key catalyst for a sector recovery. Sembcorp Industries’s strategic review could have significant implications for the rig market. Despite this, UOBKH prefers Keppel Corporation for three main reasons.

First, Keppel Corp’s established presence in the property, infrastructure and asset management sectors offers greater earnings stability.

Second, UOBKH cites Keppel Corp’s lower Price/Book multiple of 1.0x 2017F as compared to Sembcorp Marine’s 1.3x 2017F. Furthermore, Keppel Corp has a superior management that was pivotal to its Offshore & Marine (O&M) division not falling into the red, as compared to a loss recorded by Sembcorp Marine.

Last but not least, Keppel won several contracts in the last few months, apparently a “testament to its ability in securing orders in the difficult environment” of oil prices pressure and oversupply of rigs.

Keppel Corporation (SGX: BN4); UOBKH’s target price – $6.55 (HOLD)
Sembcorp Industries (SGX: U96); UOBKH’s target price – $3.66 (BUY)
Sembcorp Marine (SGX: S51); UOBKH’s target price – $1.43 (SELL)

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