Strong oil & gas activities pique interests in offshore-related plays. We marketed our Overweight call on the Singapore Offshore & Marine sector to over 16 funds in our recent trip to Kuala Lumpur. Given robust oil and gas activities in Malaysia, led by Petronas spending, there was high level of interest in Singapore rigbuilders and supporting oil & gas companies. We remain positive on the sector as we see structural fundamentals sustaining a high level of spending over the next few years. Key sector stocks which would benefit from this trend remain with those exposed to the offshore oil and gas sector such as Keppel Corp (Buy, TP SGD12.12), Sembcorp Marine (Buy, TP SGD5.20) and Ezion (Buy, TP SGD2.56). However, we would avoid shipbuilders Cosco (Sell, TP SGD0.65) and Yangzijiang (Hold, TP SGD0.93).

Comparison to Malaysian peers. Singapore players were inevitably compared to their Malaysian peers. A frequently raised observation was the premium valuations that Malaysian stocks command over Singapore plays. This is widely attributed to local players’ relative advantage in securing Petronas-related jobs. We highlighted that Singapore players, being more exposed to International spending has an equally positive outlook. Valuations for our selected picks still look undemanding on a forward-looking basis and we believe there is potential for positive rerating as the offshore up cycle becomes more evident.

Understanding risks for Singapore rigbuilders. There was also a fair amount of concern on the impact of Chinese and Korean competition on Singapore rigbuilders’ margins. Execution risk in Brazil was a key discussion point. While we acknowledge those risks, we argued (as per our 10 June 2013 report) that those concerns are overblown and there is scope for margin expansion. While investors agree that our argument is plausible, many are waiting for clearer signals in subsequent quarters. In our opinion, Keppel’s recent 2Q13 O&M operating margin, which has been sustained at 14.1% level for two quarters now, suggests that margins may have passed its bottom.

Ezion is still a star. There was still strong interest in Ezion. The key question was if there is further upside given the strong run up in share price. In our view, forward valuations of 7.5x FY14F PER still look attractive, backed by strong earnings visibility from its liftboat contracts to support a 40% CAGR in EPS over FY13-15F. We believe that there is room for TP upside revision from stronger liftboat order win momentum and catalysts from other business segments.

Source: Maybank Kim Eng Research - 30 Jul 2013