Excerpts from analyst's 78-page report

Deutsche Bank analyst: Joshua Lee, CFA

Photo: SembMarineThe risk of further blowups has diminished significantly
Our study of the sector indicates Keppel Corp (KEP) and Sembcorp Industries (SCI) are well diversified (O&M made up about half of their PATMI on average over the past three years).

Order-by-order analysis indicates counterparty risks are manageable, especially for SMM, with its focus on the deepwater segment and later delivery dates. We have accounted for key risks by removing Sete Brasil and delaying Transocean orders.

SMM and KEP’s balance sheets remain stretched but short-term liquidity and potential credit ratings are not in a distressed state yet.

Company Share
price
Target price Rating
Keppel Corp $5.12 $5.90 Hold
SembCorp Industries $2.62 $3.60 Buy
SembCorp Marine $1.53 $1.95 Buy

Historical data indicates we are in the trough of a bear cycle
Our cyclical analysis indicates the offshore rig cycle is in a trough: rig count declines have breached -20% y/y, while the decline in the oil price is c.-50% y/y. A rise in oil price usually leads an upturn in rig count by c. 8-10 months.

The data also indicate that a typical offshore rig trough period lasts less than a year, and the subsequent trough-to-peak period is c.1.5-2.5 years. The latest trough in oil prices started in July last year and a possible upturn in rig count could happen at the end of 2016 to early 2017.

♦ USD50/bbl is breakeven level for most
"USD50/bbl is a breakeven level for most projects; DBe of USD55/bbl in 2017 
DB, consensus and oil futures all forecast a higher oil price in the quarters ahead, while our US oil services team believes deepwater projects remain a long-term growth story. However, short-term supply and demand dynamics are lacking and a positive deepwater story could kick in by 2017 at the earliest."

Medium-term catalysts: utilities expansion and deepwater projects
SCI utilities PATMI could grow 41% in 2016 and double by 2018, while its marine business (SMM) has heavily priced in negative factors with a PB valuation of 1.3x – below GFC levels.

SMM is also a pure play on the O&M sector, on which we are positive, due to our optimistic view on oil prices and the deepwater segment. KEP’s balance sheet strength and property business are supportive, although it faces near-term headwinds from structural issues in the Singapore electricity market.

Valuations appear compelling with limited downside risks after the sell-off
We value SCI and KEP via SOTP, and use a PB multiple for SMM.

Key downside risks relate to a prolonged crude oil price below USD50/bbl on average, positive deepwater thesis not materializing in 2017, and utility project delays. Upside risks relate to higher E&P spending and higher-than-expected oil prices.


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