Brokers' take: UOBKH positive on offshore marine sector as oil demand recovers

WITH the global rollout of Covid-19 vaccines, coupled with Opec+'s tight grip on oil supplies, UOB Kay Hian analyst Adrian Loh expects global oil demand to recover and lift the offshore marine industry, albeit at a "snail's pace".

In a report on Wednesday, he noted that oil prices have trended towards US$80 per barrel as vaccinations in the past six months have allowed global oil demand to recover. Already, the US Energy Information Administration expects oil demand to rise by 5.4 million barrels per day and 3.65 million barrels per day in 2021 and 2022 respectively.

Furthermore, Mr Loh expects that oil prices may hit US$100 per barrel sooner than the two years that was previously predicted due to a lack of exploration capital expenditure in the past five years. In the short term, the spat between Opec+ members has also caused oil prices to rally.

"Thus, any incremental oil supply can only happen after the August OPEC meeting, and a stronger oil price would be well supported in the near term, with small-cap upstream stocks such as Rex International and RH Petrogas being potential beneficiaries," Mr Loh said.

This has potentially helped the marine offshore sector undergo a nascent recovery, as seen in the number of offshore rigs and competitive utilisation that have continued to recover.

Utilisation of semi-submersibles and drillships has risen between 8-24 per cent since the start of the year, while day rates for jack-ups have increased by 15 per cent and mid-water semis have increased by 22 per cent in the same period.

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As such, Mr Loh maintains market weight on the sector and a "buy" on Sembcorp Industries U96 , Yangzijiang Shipbuilding (YZJ) BS6 and Keppel Corp BN4 : BN4 0% with target prices of S$2.59, S$1.90 and S$6.37, respectively.

Looking at Keppel, Mr Loh forecasts that the company will generate S$3.4 billion in revenue, up 7 per cent year on year (yoy) and S$270 million in net profit.

These could be affected by contributions from the new Marina East desalination plant, comments on the progress of its O&M divestment to Sembcorp Marine and its China property outlook.

Shares of Keppel closed at S$5.27,  down 2.77 per cent  on Wednesday.

As for Sembcorp Industries, Mr Loh predicts that it will see an 11 per cent rise in revenue yoy to S$2.9 billion in the first half of 2021 and net profit before exceptional items to be up 4 per cent yoy to S$170 million.

The company’s divestment plans for its thermal assets, how well its floating solar plant startup does in Q3 this year, progress on its revenue on equity expansion and debt levels could potentially affect these forecasts.

Shares of Sembcorp Industries closed 0.92 per cent  lower at S$2.16 on Wednesday.

As for Yangzijiang, he predicts that the company will generate revenue of 5.4 billion yuan (S$1.1 billion) in Q2 this year, up 12 per cent yoy, and net profit of 754 million yuan, down 4 per cent over the same period.

“While we remain positive on the company’s shipbuilding business with gross profit margins likely to expand quarter on quarter and y-o-y, there is less certainty around the company’s trading business which experienced soft conditions in Q1 2021,” Mr Loh said.

Yangzijiang shares closed at S$1.44, up 0.7  per cent  on Wednesday.

Meanwhile, the analyst also maintained a “hold” call on Sembcorp Marine as he acknowledged that the market will be less focused on the company’s results but instead focus on its merger with Keppel Offshore & Marine. On Wednesday, Sembmarine shares were flat at 12.4 cents.

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