Here's why Singapore's shipbuilders are veering towards rough seas

Cosco and Yangzijiang will suffer as the latter lost 8 shipbuilding orders.

Here's what Maybank Kim Eng analysts have to say on offshore & marine companies' 2Q12 results:

Roller coaster ride on oil price fluctuations. Offshore & Marine stocks went through a roller coaster ride during the second quarter following the trail of gyrating oil prices. Brent crude fell briefly below USD90/bbl in June 2012 before recovering back above USD100/bbl level. Worries that declining oil price may trigger a cut in E&P spending have somewhat dissipated as oil prices recovered and offshore players reported a series of contract wins. 2Q12 results were again mixed, but generally supported our views on the sector.

Operating margins a tad lower. Operating margins for the rigbuilders, Keppel Corp (Keppel) and Sembcorp Marine (SMM), came in lower than expected but we attribute this mainly to timing issues associated with percentage-of-completion recognition. We expect margins to trend slightly higher in 2H12 and would remain in a firmer range of 14-16% as the duo depletes their high-margin orderbooks. The shipbuilders, Cosco and Yangzijiang, continue to suffer from a deteriorating outlook for the shipbuilding sector which offers no respite for shipbuilding margins in the near term.

Shipbuilders sail into tougher waters. Cosco and Yangzijiang continue to be challenged by the weak outlook of the shipbuilding industry. In this quarter, Yangzijiang saw the cessation of 8 shipbuilding orders. Faced with depleting orderbooks, drought in new orders and weak margins, shipbuilders try to find other revenue streams, such as venturing into offshore space, often doing so at low prices. We see no turnaround yet for both companies although we upgraded Yangzijiang to a HOLD as valuations have bottomed.

Contract wins supports offshore outlook. Both Keppel and SMM secured their share of Sete Brasil contracts with Keppel clinching USD4.1b worth of contracts for 5 semi-subs while SMM is to build 5 drillships at USD4.032b. Keppel followed up shortly with another USD950m FPSO topside modules contract from Petrobras and SMM with a USD135m semisub contract. Rigbuilders currently hold record high orderbooks with deliveries stretching up to 2019. We remain optimistic on order flows as rigbuilders have indicated healthy enquiries from customers.

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