Overweight maintained on offshore & marine as fundamentals stay promising.
We believe that Singapore’s offshore & marine sector (O&M) is heading towards
another boom in 2010, bolstered by positive industry dynamics including higher oil
prices, a capex revival and easing credit markets. Singapore rig builders and
service operators should be prime beneficiaries of order awards from Brazil,
Australia, the Middle East and India.
• Petrobras buzz. Petrobras has large spending plans for the next five years, which
include 28 ultra-deepwater rigs. Sentiment on the sector could be lifted as soon as
contracts are awarded in Mar 2010. With Brazilian build-out a key criterion for the
contracts, we believe Sembcorp Marine (SMM SP, S$3.49, Outperform) and Keppel
Corp (KEP SP, S$8.19, Outperform) would be favoured over Korean competitors,
as SMM and KepCorp have a presence in Brazil through existing yards and
strategic partnerships.
• Australasian wave. A surge in capex from LNG, and mining/resource firms in
Australia and Papua New Guinea could provide a real opportunity to some
Singapore O&M companies in the coming three years. Companies with exposure to
Australia are: Ezion (EZION SP, S$0.77, Outperform), Ausgroup (AUSG SP,
S$0.65, Outperform) and CSE Global (CSE SP, S$0.80, Outperform).
• Middle East heat. With stronger oil prices, we see the potential for a revival of
investments in both the oil & gas and infrastructure sectors in the Middle East and
Africa. About US$180bn worth of contracts are expected to be dished out by end-
2011 in the downstream oil segment alone. Upstream spending in field development
(offshore infrastructure) could also be on its way to a recovery after the drought last
year. Companies with exposure to the Middle East/Africa include: Rotary
Engineering (RTRY SP, S$1.05, Outperform), CSE Global, Swiber (SWIB SP,
S$0.92, Outperform) and Sembcorp Industries (SCI SP, S$3.36, Outperform).
• Top picks. Sembcorp Marine is our preferred pick among the O&M large caps
owing to its pure exposure to the sector and stronger order-win momentum in 2008-
09. We prefer Sembcorp Industries in the conglomerates space given its attractive
valuations over peers. Among the smaller caps, we like CSE for its significant
share-price upside (65%), sustainable margins and strong pick-up in earnings in
2010-11. Swiber remains the cheapest at 7x CY10 P/E, a 30% discount to its peers.