Clear survivors emerging in O&M sector: UOB Kay Hian
Singapore
SINGAPORE'S offshore and marine (O&M) sector remains cash-flow stressed, but a review of core margins showed that clear survivors are emerging in the sector despite the financial pressure of a multi-year downturn, UOB Kay Hian noted in its latest sector update.
The brokerage noted that cash flow remains a pressure point in FY16 with core EBITDA (earnings before interest, tax, depreciation and amortisation) margins declining by 4.2 per cent on average to 16.2 per cent.
In FY16, listed O&M players booked impairment charges of US$1.7 billion, largely driven by small- to mid-cap offshore support vessel players impairing the value of their assets.
Total impairments booked by small to mid-cap players for FY16 jumped to US$999 million, up from US$566 million for FY15. Impairments taken on by large-cap shipyards for FY16, however, were down 59 per cent year-on-year to US$691 million.
UOB Kay Hian noted certain small- to mid-cap companies performing positively on core EBITDA margins and net gearing as of the end of 2016 may emerge as clear survivors in this downturn. Notable mentions on the brokerage's list include Dyna-mac Holdings, Mermaid Maritime and Nordic Group.
With a strong core EBITDA margin of 14.5 per cent, the brokerage viewed Dyna-mac as a possible merger and acquisition (M&A) candidate given its clean balance sheet and a low number of major shareholders.
Mermaid Maritime in contrast is unlikely to be privatised, the brokerage said, though the listed company is "well-positioned to capture the likely recovery in subsea and pipelay activity in 2017" and its core EBITDA margin improved "the most amongst peers" to a robust 16 per cent.
Nordic Group also made UOB Kay Hian's list on the back of a healthy improvement in its core EBITDA margin plus a strong net cash position.
UOB Kay Hian maintained its preference for asset owners vis-a-vis yards as "they will be the first beneficiaries of higher activity in the sector". It downgraded Triyards to "hold" with a target price of S$0.27 owing to a corporate guarantee issue.
The brokerage cautioned however, that Singapore's O&M stocks could remain as a trading play until a significant rebound in oil majors' capital expenditure that is projected only in 2018.
"Earnings are likely to remain weak in the coming quarters, unless buoyed by a strong pick-up in utilisation or contract wins," it noted.
Oil price movements will also continue to weigh on stock prices, with Ezion Holdings, Keppel Corp and Sembcorp Marine highlighted as particularly susceptible in the sector.
UOB Kay Hian also warned against risks of O&M counters having to raise impairments if oil prices failed to stabilise in the US$50s. "This (oil price) assumption has come into question recently as oil inventories continue to soar," it said.
