What To Do With The Singapore Shipyard Sector?

As the oil and gas (O&G) industry continues to stagnate, the shipyard sector gets hit as well. UOB Kay Hian Research (UOBKH) isn’t optimistic even as we creep towards 2018 because of “stiff pricing competition from regional yards”.

Undoubtedly, shipyards are trying to get orders but hardly any contract wins to boast about. Nevertheless, if the shipyard sector were to go through some form of restructuring, there might be some hope…

CAPEX cut in response to oil prices

Major oil companies as a whole reduced their Capital Expenditure (CAPEX) by US$900 million (-5.0%) while National Oil Companies (NOCs) cut by US$750 million, a whopping 26% lesser.

Clearly, the impact of stagnated oil prices is still quite significant after a few years since it fell from historical peak levels.

UOBKH pointed out order numbers have increased on the expectations that oil prices would recover in 2017. Unfortunately, that wasn’t the case. As such, oil companies are pushing their tender awards back into 2018 and beyond.

It begets a question, though. Economists and oil experts have been expecting oil prices to recover for the longest time but time and time again, they are proven wrong by the market. So, could it be that oil prices are fairly valued at US$50-US$60?

Singapore shipyards missing forecasts

Overall, our local shipyards’ year-to-date performance is falling behind market expectations by more than 50%. It isn’t looking good as we have slightly more than three months left for 2017.

Furthermore, other shipyards in the region are offering highly competitive pricing.

UOBKH zooms in on Sembcorp Marine and Keppel Corp, two of the more prominent names in the local shipyard space.

Sembcorp Marine isn’t likely to meet market expectations of $1 billion to $1.5 billion worth of contract wins for 2017. Currently, the only way Sembcorp Marine can deliver is securing the US$1 billion Poly-GCL project.

On the other hand, Keppel Corp’s price-book valuation is hardly affected despite falling short of forecasts. UOBKH states the low profitability of the Offshore & Marine segment as the main reason.

Maintain hold on shipyards

In a nutshell, UOBKH prefers Keppel Corp over Sembcorp Marine, considering their one-year forward price-book ratio forecasts of 0.5x versus 1.3x respectively.

Nevertheless, restructuring efforts by the shipyards could open up exit options for shareholders and might outweigh the bleak outlook.

As such, UOBKH maintains their HOLD call for both Keppel Corporation Limited (SGX:BN4) and Sembcorp Marine Limited (SGX:S51) with target prices of $6.86 and $1.80 respectively.