Merrier times ahead for sector

Merrier times ahead for sector
Sembcorp Marine is predicting an earlier recovery in demand for non-drilling solutions like the Floating Production, Storage and Offloading (FPSO) vessel (above).
PHOTO: Reuters

The tide may finally be turning for the maritime sector.

Despite the waves of bad news that have hit the industry - the oil price slump, global financial crisis and closures of shipyards worldwide - some investors are seeing pockets of opportunities.

The prices of some maritime stocks on the Singapore Exchange (SGX) have continued to rebound despite downward revisions in earnings in the last quarter, noted SGX in a briefing last week.

The benchmark SGX Maritime and Offshore Services (MOE) Index also rallied close to 20 per cent from its trough last September, along with the recovery of crude oil prices.

Read also: SGX maritime & offshore index rebounds nearly 20 per cent from trough

The index, free-float market capitalisation-weighted, measures the performance of listed MOE companies here.

It consists of 18 companies with a combined market cap of over $30 billion.

Last year, these companies averaged a market capitalisation-weighted total return of -10.6 per cent.

Read also: Singapore bunker barge operator New Ocean Maritime fined for operating without licence

But this year has shown some promise - the year-to-date total return is 6.1 per cent.

A third of these 18 constituents operate shipyards - namely Keppel Corp, Sembcorp Marine, Yangzijiang Shipbuilding, Vard Holdings, Nam Cheong and Triyards Holdings.

MIXED

The performances of these six stocks in the year thus far has been mixed, ranging from a 8.7 per cent gain for Sembcorp Marine to a 11 per cent decline for Nam Cheong, according to an SGX report last month.

And just like the Singapore economy, the industry performed slightly above expectations last year.

In 2016, the local transportation and storage sector grew 2.3 per cent, mainly supported by the water transport segment, according to latest Ministry of Trade and Industry (MTI) figures.

Overall sea cargo volumes rose 10 per cent in the fourth quarter, bolstered by a 26 per cent surge in oil-in-bulk shipments.

Although container trade fell marginally by 0.1 per cent last year, it was a dramatic improvement from the 8.7 decline in 2015.

Nonetheless, the marine and offshore sector is still expected to continue facing headwinds this year, said MTI, when announcing the gross domestic product forecast last month.

For instance, shipyards with excess yard capacity is an issue that needs to be resolved, noted a Feb 7 SGX report.

As a result, there is rising pressure on shipyards to restructure or merge to derive greater cost savings and compete with global peers, it added.

But analysts are expecting shipyards with sound fundamentals to emerge stronger from this downturn.

Companies with net cash or operating cash flows are likely to survive the crisis, said SGX at last week's briefing.

Investors can also look out for order book momentum - new contracts and projects are a promising sign of a company's health. (See report on right.)

And there are several opportunities for investors seeking bargain stocks on the SGX.

For instance, current valuations are undemanding, with shipyard stocks such as Yangzijiang Shipbuilding trading at 0.7x P/B, which is a 22 per cent discount to the global financial crisis trough of 0.9x P/B.

PB ratios are one of the valuation metrics used to value the MOE Sector, especially when earnings may be depressed or negative, which may result in abnormal or unavailable price-to-earnings ratios.

Much of the optimism for the sector's revival can be attributed to the recent stabilisation of oil prices.

After reaching a record low of US$25 (S$35) per barrel last January, it stabilised to US$50 to US$55 levels due to ongoing supply cuts led by members of the Organiation of Petroleum Exporting Countries.

Most analysts expect the price to be further boosted to US$55 to US$60 per barrel by the end of the year.

In the long term, oil demand is expected to grow strongly until at least 2022 with the main developing economies leading the way, according to the latest International Energy Agency (IEA) report, which was released on Tuesday.

The IEA, which studies oil trends, also noted that the fall in oil prices over the past two years has resulted in an unprecedented drop in investment for upstream projects, which would then affect production capacity.

"There is a risk of prices rising more sharply by 2022 if the spare production cushion is eroded," noted the report.

POSITIVE

With current oil prices stabilising, the consensus is for the sector to return to profitability in the next three years as forward return on equity turns positive, said SGX.

Although downstream industries such as shipyard owners are likely to lag the oil price recovery because of their position at the bottom of the supply chain, they can perhaps find some relief with government support.

The survival of the MOE sector is crucial as it builds on Singapore's strength as an international maritime hub.

MTI announced last November some enhancements to IE Singapore's Internationalisation Finance Scheme and the re-introduction of Spring's Bridging Loan to support the sector and facilitate MOE companies' access to working capital and financing.

During the recent Budget, the Government also deferred the Foreign Worker Levy increase for the marine sector, which is heavily dependent on foreign manpower.


This article was first published on Mar 09, 2017.
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