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CIMB: 3 Stocks to Buy in Offshore & Marine Sector
Aspire, Hot Picks | 30 October 2015
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By: Lim Si Jie
Articles (169) Profile

Amid reduced earnings across offshore and marine (O&M) sector, and oil prices hitting a double-bottom, CIMB still sees buying opportunity in the natural offshore and marine sector.

Despite upward pressure on net gearing and debt service coverage, CIMB believes that there are still O&M companies that are worth buying given that the credit pictures of these companies are holding up relatively well.

What If Oil Falls Below $30?

Source: CIMB

Fearing that “things could turn ugly” if oil prices were to plummet to a new low, local banks have been scrutinising their O&M loan books. According to CIMB, local banks would remain supportive if they are convinced that their lenders/customers would be able to successfully emerge from the downturn and ride the next up-cycle. Continued business support from local banks is a strong indication of the company’s ability to turnaround in the upturn.

Credit Picture of the O&M Sector

Source: CIMB

As of 1H15, companies under CIMB’s coverage had an average net gearing of 0.7x, which CIMB considers as manageable. While debt service cover for FY15 has come under pressure (average of 6x), these companies are still able to comfortably service their interest payments, with an average interest cover of 5.2x for FY15.

Source: CIMB

However, investors have to be careful in picking stocks in the offshore and marine sector given that majority of the companies have stretched credit ratings. For example, there are possible financial restructuring or cash calls for Otto Marine and Swiber, which are not under CIMB’s coverage.

Investors Takeaway: Three Stocks to BUY in the O&M Sector

CIMB believes that the way to invest in the sector is to park some money in selected stocks to ride sharp rebounds from any sentiment boost. The recent market rally over the past week profited from parking money in selected well-picked O&M stocks. CIMB signalled that the risk of such a strategy could be having money locked in should price falls. However, the limited downside provides a good risk-to-reward ratio to counterbalance the risk.

1. Keppel Corp: Positioned For Upturn

CIMB recommends buying Keppel for its earnings and RNAV buffer from property. With its recent acquisition of Cameron’s Letourneau rig design division, CIMB sees Keppel positioning itself for a bigger market share when the rig market recovers.

Keppel Corp: BUY, TP $7.46

2. Ezion: Resilient Business with Long Term Contracts

Ezion’s first-mover advantage in the underpenetrated ASEAN liftboat segment continues to receive strong recommendation from CIMB. Backed by strong cash flows from its long-term contracts (debt service cover of 4.5x and interest cover of 6.7x for FY15), its net gearing of 1x is arguably manageable.

Furthermore, the company does not have any notes payable in 2016-17. This also means that the company will not face refinancing pressures amidst this tough operating environment. Crucially, CIMB also found that the company is resilient when stressed. When CIMB modelled Ezion in a scenario whereby 10 of its 37 service rig portfolio contracts are cancelled, its credit metrics are still relatively healthy (debt service cover of 4.3x and interest cover of 6x for FY16 under stress-test).

Ezion: BUY, TP $1.30

3. Pacific Radiance (PACRA): Mispriced Valuations

Although PACRA has a high debt service coverage of 9.9x for FY15 (suffers from lower asset yields), CIMB’s due diligence shows that PACRA is still able to service interest payments, even when stressed (interest cover of 3.9x for FY16 under stress-test). That being said, CIMB acknowledges that PACRA’s ability to take on additional debt to grow new business might be cut back.

CIMB’s recommendation for this stock is mainly value-oriented. With the stock trading around 40 percent below CIMB’s estimates of its liquidation value (S$0.62/share), the financial risks are mispriced. Furthermore, PACRA has one of the cleanest balance sheets in the sector and its fleet of vessels is young, mainly shallow water and diversified.

Pacific Radiance: BUY, TP $0.81

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

Keppel Corp  6.180 +0.01 +0.16%   
Business: [FY18 Turnover] Infrastructure (44.1%), offshore & marine (O&M) (31.4%), property (22.5%), investments (2%).

Insight: Jan-19, FY18 revenue was largely unchanged at $6b,... Read More
Ezion Hldgs  -- -- --   
Business: Co develops, owns, and charters offshore assets to support the offshore energy markets. [FY17 Turnover] Liftboats (49.7%), Jack-up Rigs (39.5%), Offshore Support Logistic Services (10.8%).

Insight: Aug-18, 1H18, Co returned to the black with a net ... Read More
Pacific Radiance  -- -- --   
Business: Co is a provider of offshore support solutions with a fleet of more than 130 vessels. [FY17 Turnover] Offshore support services business (62.4%), subsea business (27.8%), complementary business (9.8%).

Insight: Nov-18, 9M18 revenue fell 5.7% to US$45.9m mainly ... Read More


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