Excerpts from analysts' report
UOB Kay Hian analysts: Nancy Wei
(left) & Vijay Natarajan
Shipyard valuations have a strong relationship with oil prices. In the last two oil cycles spanning 2005-14, yard valuation – as proxied by Sembcorp Marine’s 1-year forward PE – tracked a wide range.
Trough PE was 4x in 2008 while peak PE was 23x in 2011 (18x in 2007). We now value Keppel and SMM’s (SembMarine) yard businesses at 9.5x (15x previously). We cut target prices by 12-25% and downgrade Keppel Corp to HOLD. Our top stock pick is SCI. Maintain MARKET WEIGHT.
WHAT’S NEW
• Oil – The new normal. Following OPEC’s meeting last Thursday, selected OPEC members and industry experts have expressed Brent oil prices are likely to hit a floor level of US$60-70/bbl for a while, in order to have stability in the years ahead at US$80+/bbl. The short-term weak oil prices should flush out high-cost oil production and thus return the oil market to an even demand-supply keel. OPEC’s median budgetary breakeven is about US$100/bbl.
• A strong correlation between stock valuations and oil prices. Singapore shipyard valuations have a direct correlation with oil prices. Sembcorp Marine’s (SMM) historical PE and P/B valuations vs oil prices are a good valuation guide for a pure shipyard stock. In a rising oil price situation, share prices of Keppel Corp (Keppel) and SMM would usually see a steep climb, buoyed by two simultaneous factors: a) rising contract wins, and b) a PE or P/B valuation expansion. Conversely, share price deflation can be equally steep, especially when Brent oil prices fall below US$80/bbl, in our view.
During the 2008-09 economic crisis, SMM’s PE collapsed from 18x in 2H07 to 4x by end-08, in tandem with a collapse in Brent oil prices from US$140/bbl to US$40/bbl. Since 2005, SMM’s share price and Brent oil prices have had a high correlation (R2 = 0.73).
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ACTION
• Revising our valuations. Based on a Brent oil price of US$60-70/bbl, our adjusted regression analysis suggests SMM should be priced at a 1-year forward PE of 9.5x. Accordingly, we cut our target price for SMM by 25% from S$4.00 (2015F PE of 15x) to S$3.00 (2016F PE of 9.5x).
We have rolled forward our valuation by one year. We likewise value Keppel’s offshore & marine (O&M) business at 2016F PE of 9.5x and lower our target price by 25% from S$12.60 to S$9.50 based on a revised SOTP valuation of S$9.49/share.
We maintain our HOLD valuation on SMM and downgrade Keppel from BUY to HOLD. As for Sembcorp Industries (SCI), we maintain our BUY call, but cut our target price by 12% from S$5.80 to S$5.20 based on our new target price of S$3.00 for SMM that yields a revised SOTP valuation of S$5.21/share.
SCI is the most resilient among the three stocks with half of its earnings derived from its utilities business. We maintain SELL on COSCO Corp with a lower target price from S$0.65 (2014F P/B 1.0x) to S$0.56 (2015F P/B 0.8x).
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