Get a glimpse of who's really leading in Singapore's offshore-marine industry

Industry boasts of hefty S$18bn worth of new orders this year.

According to Macquarie Research, 2012 has shaped up to be a record year for the SG yards, with already S$18bn of new orders, led by Petrobras (73% of total orders), which we think is reflected in robust stock returns (+25-35% each). However, the focus is now shifting to sustainability of the cycle in 2013-15 and the impact on SG yards.

Here's more from Macquarie Research:

Does the rig building cycle have more legs?: With Brent sustaining >US$100/bbl, there is incentive for oil majors to explore more and order more rigs, in our view. In addition, the UDW market is very tight, with all 117 rigs contracted, indicated by day rates which are inching towards 2008 highs.

What’s the sustainable annual order inflow run-rate for 2013-15?: S$5bn each for KEP and SMM (Rigs – S$3.5bn & Production –S$1.5bn) in our view.

What could surprise beyond the normal run-rate?: Semi-sub demand could surprise: The UDW Semi-sub market is very tight (currently all 60, and 11 out of 17 being built, have contracts). New exploration in GOM and North Sea will require more UDW Semi-subs. Our pipeline analysis indicates 20 prospective Semi-sub orders in 2013.

Don’t count Petrobras out; could order more beyond pre-salt: 7 Drillships awarded to EAS in 2011 could be cancelled in 2013 due to
delays, and be awarded to SG yards, in our view. Also, 32 out of current 64 floaters are >25 years old and replacement demand could emerge.

What is the long-term growth strategy for SG yards?: Strategic partnership with Brazil: By building yards in Brazil, SG yards have indicated a long-term commitment to Brazil and should benefit in the long run through new oil rigs and FPSO orders, in our view.

Targeting new rig segments: SMM is targeting the Drillship market, dominated by Korean yards, by building Drillships for Petrobras. KEP is targeting new segments like wind turbine Jack-ups and Arctic drilling Semi-subs. Also, both yards are building Accommodation Semi-subs.

What are the long-term sustainable margins?: We think 14%. Investors seem to overlook the fact that ~35% of KEP and SMM’s revenues come from higher margin production and repair jobs. Also, Brazil rig orders will only form ~5% of EBIT from 2012-14E, and thus will have minimal impact on margins.

SG yards are very well placed; we prefer SMM to KEP: We think SMM has a higher-quality order book (better quality buyers and orders), higher earnings growth (16% CAGR over 2012-15E vs 2% for KEP), and a better long-term growth strategy (venture into Drillship market, and increasing market share in the high-margin ship repair business through a new yard in Singapore).

Not cheap, but not expensive either: We think SMM in particular still has room to re-rate its 14x P/E and 3.5x P/B 2013E multiples given our expected high earnings CAGR of 16% over the next 3 years and robust ROEs of 25-30%, which we think the market is underestimating.