CIMB analysts: Kenneth Ng, CFA (left) & the Singapore Research Team
During the 2008 global financial crisis, the oil & gas share prices fell 5-10% in the first month of decline, before dropping another 20-30% over the next two months. In 2012, maritime, oil & gas, basic material stocks fell more in the next two months, even when reasonably resilient in the initial month of when crude oil prices fell >20%.
Whilst current stock valuations are attractive now, the more important factor is fundamentals and we question what has changed. In the sector, the big boys - Keppel and SembMarine - are facing slowdown in new rig orders but have compensated with conversion jobs. Meanwhile, there is a clutch of smaller players that have bought old vessels and converted them for jobs that do not require high-specification vessels.
Our O&M (offshore & marine) analysts believe that if the new normal for oil price is US$80/bbl, the deepwater fields (cost of extraction is more expensive) will be vulnerable to reduced activity. Consequently, overall orders for Keppel and SembMarine will come under more pressure. Hence, our big-cap capital goods pick is Sembcorp Industries, if there is need for any.
Our O&M team believes that the business models of Swissco and Ezion are more resilient, as their old vessels are cost-competitive and will likely get charters, even if that is at lower day-rates. In the offshore support vessel space, the businesses of players like PACRA (Pacific Radiance), with its locally-flagged vessels operating in shallow Southeast Asian waters, will be more resilient.
Comfortdelgro would benefit the most from reduced fuel costs. The benefit of lower energy costs to SIA could be whittled away by competition, since it lacks pricing power.
We downgrade our sector ratings for Consumer to Neutral (from Overweight), for Capital Goods to Underweight (from Neutral) Indirectly, the consumer sector is at threat too if Indonesia and Thailand struggle as commodity prices come off. If crude oil prices remain depressed, we would be increasingly positive on the transport sector. and have upgraded Transport to Overweight (from Underweight).
Our country model portfolio includes CD (ComfortDelGro), GLP (Global Logistic Properties), MINT (Mapletree Industrial Trust), OCBC, UOL and THBEV (Thai Beverage). Our small cap picks are FCOT (Frasers Commercial Trust), OSIM, PACRA (Pacific Radiance) and QTVC (QT Vascular).
Full report here