• Conglos/yards – few big orders despite higher oil
• Transport – only CD is up
• Prefer STE and SIA

Conglos/yards Space – 2018 a Year of Realisation for Some

Our year-end report for the Oil and Gas sector last year was titled “Awaiting contract wins”, in which we expected a gradual recovery in 2018 and mentioned that a re-rating of stocks in the sector would require a continued flow of contract wins. We recall that there was significant excitement in the market in the earlier part of this year, with great expectations for new order wins along with speculation of a possible merger, but both disappointed as we cruised through the year. This is despite crude prices continuing their upward climb till end Sep.

We believe a clear point of realization for some erst-while bulls came in mid Jul when Sembcorp Marine’s management said that the group’s transformation efforts to move up the value chain has resulted in new business opportunities but they require significant time and effort in project co-development with potential customers.

Such new-build EPC projects have a detailed engineering and construction planning phase, which may take as long as six to 12 months. In this sub-sector (Keppel Corporation, Sembcorp Industries, Sembcorp Marine, ST Engineering (STE), Yangzijiang Shipbuilding), only STE is up YTD.

Transport-related Names – Only ComfortDelgro Is Up YTD

Among transport-related names (ComfortDelgro (CD), Singapore Airlines (SIA), SATS, SIA Engineering), all are down YTD except for CD, aided by a rally in Apr-May when Uber exited Singapore. In general, this has been a rather stable sub-sector with relatively less volatility, though SIA Engineering saw a 15% fall over two weeks post its 2QFY19 results and our rating downgrade.

We upgraded SIA to BUY in mid Oct on valuations after it closed at S$9.15, implying P/B of 0.8x (2008 crisis levels). For SATS we downgraded to Hold on 9 Nov after it closed at S$5.11. After a 9.1% correction, we are now upgrading to BUY together with this sector report.

Preferred Picks – STE and SIA

Among the Singapore Industrials space, we prefer STE [BUY; FV: S$3.95] with its earnings resilience, backed by a stable and diversified order book across industries, and SIA [BUY; FV: S$10.71] due to its low valuations. The offshore oil and gas sector should continue its gradual recovery, underpinned by cost deflation across the industry and lower break evens.

Source: OCBC Research - 29 Nov 2018