In a Friday report, analyst Low Pei Han says, “Our preferred picks are Keppel with a fair value of $8.41 and Sembcorp with a fair value of $3.59, though we note that a faster-than-expected recovery in oil price or contract flows would benefit SembMarine the greatest.”
OCBC has a $2.26 fair value for SembMarine based on 1.8 times FY18 earnings.
To recap, OCBC first turned less negative on SembMarine in Dec 2016 when the house upgraded its ratings to “hold” from “sell” and later upgraded it to “buy” on Feb 23. Keppel was also upgraded to “buy” on Feb 22.
According to Low, the O&G downturn started in earnest in 3Q14. At end 2014, OCBC sounded caution on the broader sector with its report “Go for quality in 2015”, followed by “Patience needed; expect more trading opportunities” at end 2015.
Last year, OCBC headlined its report with “2017 to be as newsflow heavy” and also hinted that 2017 could see a recovery in sentiment, especially in the second half of the year.
“Indeed, we saw a pickup in share prices of the large caps starting early this year, which took a breather in the middle of the year, readying for another spurt in 3Q17,” says Low.
Low says while most O&G mid and smaller cap stocks remained subdued due to continued bond and restructuring of companies, what was witnessed in 2017 remains rather tame by historical standards.
See also: UOBKH raises TP on SIA to $6.22, FY2026 earnings to see lift on fuel cost savings
He believes that the share price recovery for big caps is mainly a normalisation from previously oversold levels, along with some hope that new contracts will be secured again, though in fits and starts.
Looking ahead in 2018, the analyst expects the sector to recover gradually, as oil majors adapt to the lower oil prices environment and are better positioned to proceed with final investment decisions.
Orders are still mainly expected from the non-drilling segment as recovery in the drilling market will still take time.
However, should there be significant contract wins in 2018 for Keppel and SembMarine, Low sees chances for trading opportunities like the price spikes we saw this year especially for the latter.
“A sustained recovery will only ensue with a continued flow of contract wins, which will drive a rerating of related stocks in the sector,” says the analyst.
Shares in Keppel are trading at $7.76 or 16.5 times FY18 earnings while shares in Sembcorp Industries are trading at $3.04 or 15.7 times FY18 earnings. Meanwhile, shares in SembMarine are trading 3 cents higher at $1.88.
