Selldown in O&M stocks hammers Keppel, SembMarine

Singapore

THESE days, the Red Sea doesn't just contain oil. Offshore and marine stocks (O&M) now find themselves swimming in it, too, as they fight to stay afloat amid a sector-wide plunge that analysts warn could be even deeper than what the industry went through during the global financial crisis (GFC).

Waves of panic selling engulfed Singapore-listed O&M counters on Thursday after Brent crude oil briefly dipped below the US$30 per barrel mark, sending some stocks to their lowest valuations in over a decade.

Rigbuilders Keppel Corp and Sembcorp Marine were also hammered by news of their major customer Sete Brasil potentially going bust, which has spurred fears that the two firms might have to take massive writedowns of as much as S$2 billion in revenue as a result.

With few bright spots, the damp sentiment could drag on for some time even though the sector may look oversold, analysts said, adding that investors should beware of falling knives unless they can afford to hold.

Keppel shares fell below S$5 on Thursday for the first time since the global financial crisis. The stock retreated 6.4 per cent or 33 Singapore cents to finish at S$4.86, its lowest since April 2009. Its GFC trough was S$3.20 in October 2008. It has returned -25.4 per cent year-to-date, Bloomberg figures show.

Sembcorp Marine, which analysts said lacks diversified segments such as Keppel's property arm that can help to cushion blows to its bottomline, did even worse. It plunged 6.8 per cent or 10 Singapore cents to end the day at a miserable S$1.37, its lowest since March 2009 and not too far from its S$1.12 GFC trough in October 2008. Its year-to-date return was -21.7 per cent.

The companies' valuations have also hit their lowest in nearly 15 years. Keppel's price-to-book (P/B) ratio was about 0.82 on Thursday, the lowest since 2002, while SembMarine's hit 0.96, its worst since 2001, according to Bloomberg data.

The steep declines precede a Jan 21 meeting at which Sete Brasil investors will decide whether Sete should file for bankruptcy. That also happens to be the day of Keppel Corp's Q4 results briefing. SembMarine's Q4 results will be out on Feb 15, but it has already issued a profit guidance warning of a net loss for the quarter.

Analysts said prospects for the O&M sector are generally dim, noting that predictions of oil possibly falling to as cheap as US$10 per barrel are being bandied about.

"The GFC was nothing compared to this," said KGI Fraser analyst Joel Ng. "The oil slump will hit everyone in the sector, even shallow-water players. Fleet utilisation levels are the worst we've seen for the past 10 years or so."

The rapid plunge in crude signals the end of a rig cycle boom for Keppel and SembMarine and they will have to find other avenues for growth besides rigs for the next five years at least, he added. Noting that the two stocks are at trough valuations, he said they are starting to look attractive from a fundamental point of view but warned: "They say don't catch a falling knife, and this is exactly the moment."

RHB analyst Lee Yue Jer estimated that if Sete Brasil goes bankrupt without a plan for paying creditors, Keppel and SembMarine could each have to write back up to S$2 billion of revenue that they have booked on the rigs they are building for Sete. The corresponding writedown on profit might be 5-10 per cent of revenue, he said.

Analysts warned that smaller and more indebted companies could go under too. "Bankruptcy risks are heightened, especially the highly geared smaller players with bond maturing in the near term," said DBS analyst Ho Pei Hwa.

Maybank Kim Eng analyst Yeak Chee Keong said O&M companies with net gearing above 1.0x and Ebitda-over-interest expense of less than 3x would be in danger, one example being Swiber. But "the bright spot will be that stronger players may be able to buy distressed assets at cheap prices . . . and emerge as a stronger player with greater market share in the longer term", he said. "In the near term, it's about survival."

Analysts said there are a few diversified stocks that could be a bit more resilient against the oil slump.

For instance, Ezion Holdings and Triyards Holdings could do relatively better due to the "brighter outlook of the segment they are operating in, as well as their relatively more diversified operations", OCBC Investment Research analyst Low Pei Han said.

Mr Lee was also bullish on Triyards, saying its earnings could grow in 2016 and it has received a lot of new orders from firms outside the oil & gas industry. He added that he thinks the O&M selldown is overdone. "Our O&G sector is already mispriced, and has gone to levels at which fundamentally the valuations are far too low . . . all bearishness has been priced in at this point in time. The implication of valuations now is that oil prices will stay low, around US$30-40 (per barrel), pretty much indefinitely. But this is not a long-term sustainable price."

Triyards was not spared on Thursday, shedding 5.4 per cent or 2.5 Singapore cents to end at S$0.435.

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