ASEAN Offshore &Marine:What got you here,won’t get you there

The long, harsh winter continues; new order outlook deteriorates further: Withoil prices remaining below USD60/bbl, the expected order recovery from new productlines hasn’t materialised for KEP and SMM. In addition, the situation in the global oilrig market has deteriorated, with c50% of global rigs now lying idle (vs 40% in 2016).Order inflows have, as such, been negligible in 2017YTD after a weak 2016.Therefore, we reduce our 2017e order inflow estimates for KEP and SMM to SGD1bneach from SGD2bn earlier, while we reduce our day rate assumptions for Ezion.

    Yard utilisation risk increasing by the day; SMM and KEP to hardly make money:

    With large yard capacities, both SMM and KEP are now sitting on a small order book ofaround SGD3.5bn each, which can only sustain revenues for 1.5years, in our view. Wethink revenue generation will face significant downside risk from 2019e and both yardswill make hardly any profits for the foreseeable future, given high fixed costs.

    Cheap valuations just a mirage; key multiples close to five-year peaks: Whilethe sector might look like it is at the bottom of the cycle in PB terms, the ROE profilesof all O&M companies have deteriorated sharply from 20-40% in 2011to only 2-9%now. Therefore, in PB/ROE terms, the stocks are trading close to five-year peaks.KEP and SMM are also trading close to five-year peaks on an EV/order book basis.

    Street overly bullish on KEP and SMM; value emerging in YZJ and BAB: We seesignificant 20-50% downside risk to the Street’s earnings estimates for KEP, SMM,SCI and EZI as the Street continues to be overly optimistic on new order flowprospects and underestimates the impact of fixed costs. We reduce our earningsestimates (by 20-50% for 2017-19e) and target prices for KEP, SMM, SCI and EZI,and now have Reduce ratings on all of these four stocks.

    We see better prospects for YZJ and BAB, two companies that have positivelysurprised with their order flow and operational performance in the past 12months.We raise our earnings estimates for YZJ and target price and upgrade the stock toBuy from Hold, while we also upgrade BAB to Buy from Hold as it is the only stock inour O&M coverage that has a strong earnings growth and positive FCF profile.