SINGAPORE (July 13): CGS-CIMB Securities is maintaining its sector “overweight” on Singapore’s offshore & marine (O&M) industry with expectations of Yangzijiang Shipbuilding to deliver stronger q-o-q earnings on stronger shipbuilding margins.
The counter has been rated “add” with a target price of $1.27, ahead of its 2Q results due Aug 8.
In a Tuesday report, analyst Lim Siew Khee says Yangzijiang’s shipbuilding margins could improve to about 20% from 17% previously, with an estimated quarterly group profit of about RMB720 million ($147.2 million) after the delivery of +20 vessels.
“Held-to-maturity (HTM) income could grow q-o-q with new portfolios renewed a higher yield. There could be some positive translation impact from depreciating Rmb. The stock is trading at trough valuations of 0.6x CY18F P/BV. Upside to earnings could come from provision write-back at end-18,” says Lim.
The analyst however is less optimistic on Keppel Corporation, Sembcorp Marine (SMM) and Sembcorp Industries (SCI) which she expects to post weaker q-o-q earnings on the back of a slower pace of orders, which has prompted CGS-CIMB to cut its forecasts for FY18F.
Nonetheless, Lim is maintaining her “add” rating on Keppel Corp with a lower target price of $8.81 compared to $10 previously, as she believes the group could still dish out a special 50th anniversary dividend of about 10-12 cents, given its stronger balance sheet and active asset recycling strategies.
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She also continues to like the stock for its multi-asset growth platform and relatively stronger O&M margins.
SCI should also see better utilities earnings of $83 million with higher load factors in India, in Lim’s view, which would lead India to swing into the black. She notes that excluding SMM, SCI’s utilities business is trading at an undemanding valuation of 0.3 times CY18F P/BV, which is 2 standard deviation points down since 2010 versus a ROE of 7%.
Lim has rated SCI “add” at a target price of $2.68, and expects the group to deliver a 2Q net profit of $75 million, representing a 2% decline q-o-q but 35% growth y-o-y.
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Meanwhile, the analyst is expecting SMM, rated “add” at a target price of $2.52, to deliver a net loss of about $20 million based on its -1% EBIT margin and management guidance.
“We think losses may not shock the market anymore but the focus will be on how fast SMM can clinch sizeable orders to improve yards’ utilisation and operating leverage. It is trading at c.1.7 times CY18F P/BV, or -0.5 s.d of 5-year mean,” observes Lim.
Overall, CGS-CIMB has cut order targets for all the above mentioned stocks to $2 billion each for 2018, especially since Keppel O&M and SMM secured $800-900 million each in 2Q and YTD versus the research house’s $3 billion target for the year.
Shares in YZJ, Keppel Corp, SCI and SMM were last at 89 cents, $6.69, $2.64 and $1.96 before the midday trading break.
