SINGAPORE (Jan 12): Even as valuations for small- and mid-cap offshore and marine (O&M) companies are currently undemanding after significantly underperforming the benchmark Straits Times Index in 2017, CIMB Research says it is not yet time to hop on to these stocks.
“Valuations of small and mid-caps are still at aggregate P/BV trough valuations of 0.36x CY18F,” says CIMB lead analyst Cezzane See in a Friday report.
“However, we believe clearer entry points will emerge after 1H18 once the ‘housekeeping’ exercises (such as impairment and refinancing) are completed, providing better visibility on earnings growth,” she adds.
As such, See expects an “uninspiring” 4Q17 for the small- and mid-cap segment.
Within the segment, See says CSE Global stands out for its net cash position.
“However, its valuation has risen to its 9-year average of 14x 12M forward P/E but its FY18-19F average earnings of $14 million per annum are significantly below its average of $30 million since 2009,” See adds. “Hence, we see an opportunity to take profit.”
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CIMB is keeping its “reduce” call on CSE with a target price of 31 cents.
As at 4.17pm, shares of CSE are trading flat at 37 cents.
“Looking back to the two previous downturns, we note that small/mid-cap stocks will typically emerge as outperformers in the long run, providing scope for tactical trades,” See says.
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For now, however, See points to the big caps – Keppel Corp and Sembcorp Marine – as the research house’s preferred picks for the O&M sector.
This comes despite a corruption scandal that has rocked Keppel, involving illegal payments made to secure projects in Brazil.
On Dec 23, 2017, the company said its offshore and marine arm had reached a global resolution with authorities in the US, Brazil and Singapore in relation to corrupt payments made by a former agent that will see it pay fines of more than US$422.2 million ($561.1 million).
See: What Keppel's corruption scandal means for investors
So far, Sembcorp Marine has denied all allegations of wrongdoing. But the market’s attention could now turn to the oil rig builder, which has also been linked to the scandal.
See: Sneak peek: SembMarine comes under the pressure after Keppel's US$422 mil settlement
“We believe the clearer way to ride the sector still lies with large caps [Keppel Corp] and [SembMarine],” See says.
CIMB has “add” calls on both Keppel Corp and SembMarine, with target prices of $8.58 and $2.49, respectively.
As at 4.17pm, shares of Keppel Corp are trading 8 cents higher at $7.99 while shares of SembMarine are trading 1 cent higher at $1.86.
