Rigbuilders’ earnings at risk in 2012 and 2013

Compared to $19.8b in 2008, Keppel and Sembcorp Marine’s current orderbook is only $15.5b.

According to DBS, while offshore yards are in a better position than shipbuilders, risks to new orders are rising, leading to cuts in their target prices.

Here’s more from DBS:

Rigbuilders in a stronger position than shipbuilders vs 2008. We compare the offshore and marine sector fundamentals vs. the 2008 industry downturn against four key risks which pushed share prices down to trough levels: 1) drought of new orders, 2) order book visibility, 3) contract cancellations and 4) clients facing liquidity issues. While offshore yards are in a better position than shipbuilders, risks to new orders are rising, leading to cuts in our target prices.

Weaker earnings visibility for rigbuilders than 2008. KEP and SMM’s current orderbook of S$15.5b is lower than 2008’s S$19.8b. Earnings will be at risk in 2012/2013 if new order flows dry up over the next few months due to macro risks, given low coverage ratio of 1.9x (KEP) and 1.5x (SMM). About 66% of FY12 O&M revenue forecasts for KEP are backed by secured orders, vs. 40% for SMM, implying higher earnings risk for SMM should order wins underperform expectations.

But risks of order cancellation and client default are lower compared to 2008 as offshore yards are taking on more contracts on balloon payment terms which could lead to delays in clients taking delivery, in a worst case scenario.

Order flows could slow, cutting target PE. While current oil prices support E&P capex, and drillers remain positive on rig utilisation and day rates, the risks of recession and credit tightening could lead to a deferment in orders. We reduce our FY12 order wins assumptions by 20-40% in our base case, assuming slower global GDP growth.

While the impact on earnings is marginal, we are cutting back our target PE from 18x (+1.5SD) to 13x (mean), new TPs in our base case are KEP - S$10.38, SMM - S$4.80, and SCI - S$4.50. In a recession scenario, order wins could trickle closer to GFC
level at S$3b. Target prices pricing in a recession scenario (PE at -1 SD of 8.7x) will be Kep – S$7.42, SMM – S$3.17 and SCI – S$2.90.

China shipbuilders –back to trough levels. We see higher risk of China shipbuilders slipping to trough valuation of 5x. Orderbook is weaker than 2008, earnings visibility is low with a coverage ratio of 1.7x vs. 2008's coverage ratio of 4.7x. Orders are drying up amidst weak freight rates, while competition could add pressure on new building prices. We cut YZJ and JES to HOLD on lowered TP of S$1.10 and S$0.20, Cosco remains FULLY VALUED, TP reduced to S$1.00.

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