The secular trend is upon us; maintain Overweight. Oil price at USD100/bbl yields positive economics for E&P spending that could spawn fresh records after a record-breaking 2013 with est. USD678b spend. Led by NOCs with national agendas for energy security, industry spending is more secular than cyclical. We expect offshore oil and gas activities to gain momentum as the industry gravitates towards the development phase. As spending percolates through the value chain, offshore construction, installation and subsea activities will pick up and in turn, benefit the offshore shipyards and oilfield services players.

Rig building boom: Semisub orders to return, OSV demand to rebound. In our view, the rig building industry is in the midst of a multiyear up-cycle. Strong demand for shallow-water jackups is already evident, and US drillers such as Transocean have started to upgrade their fleet. According to Wood Mackenzie, at least 95 additional deepwater floaters are needed from 2016 to 2022 to exploit discoveries in deepwater. We project a return in deepwater floater orders (particularly semisubs) from 2014 as (1) utilisation rates have breached 90%, (2) dayrates are rising, and (3) only four semisubs are to be delivered beyond 2016. Robust rig building activities underline our view that the OSV market is poised for a cyclical rebound, as more rigs entering the water would fuel demand for support services.

Buy SMM to ride the rig building cycle. Our top sector pick, Sembcorp Marine (SMM), should benefit from flow-over orders in view of tight yard slot availability at Keppel Corp (KEP). We prefer SMM to KEP because the former offers (1) pure-play exposure, (2) a stronger three-year EPS CAGR of 13.5%, and (3) an attractive FY14F P/BV of 2.9x (mean 3.6x, -1SD 2.5x). We expect SMM’s margins to recover in FY14F, underpinned by (1) more high-margin ship repair jobs (~SGD600 to SGD1.2b in FY14), (2) an uptrend in average price of rig contracts secured, and (3) efficiency gains from repeat execution.

Nam Cheong to reap from OSV recovery. Nam Cheong stands to benefit early from this upturn because of (1) earlier vessel availability due to its build-to-stock model, (2) strong domestic market support in Malaysia due to Petronas’s USD100b five-year capex plans, and (3) aggressive step-up in shipbuilding programme ahead of demand.

Ezion still has legs to run. We continue to favour Ezion for three reasons: (1) the liftboat market in Southeast Asia is still underpenetrated, (2) the marine supply base business is a new growth driver, and (3) potentially higher valuations as free cash flow turns positive on strengthening operating cash flow and tapering of capex by end-FY14.

Sell Yangzijiang for excessive price run-up, Cosco for poor execution. We are not optimistic that Chinese shipyards will see a rebound in the shipbuilding sector in 2014. While we like Yangzijiang (YZJ) for its strong execution and rational approach in combating the sector downturn, we view the recent run-up in share price as excessive. As for Cosco, it has not been able to demonstrate good offshore execution and remains mired in the downturn. Yet its valuation at 25x FY14 PER is one of the richest among its peers.

Source: Maybank Kim Eng Research - 11 Dec 2013