For one, interest costs remain high, which discourages a major capital expenditure cycle. Companies that survived the previous boom-and-bust cycle are now more cautious, wary of becoming over-leveraged and left with idle vessels or underutilised yards if the market softens.
Many of these companies that are still in business today have been compelled to expand their offerings to capture new opportunities in the renewable energy sector, picking up new capabilities and making new investments along the way. “It has not been easy for the operators as well as the yards themselves,” says Lim in an interview with The Edge Singapore.
A fixture at the briefings of O&M companies and conglomerates such as Seatrium and Keppel, Lim is observed to have kept CEOs and CFOs on their toes with her in-depth, multi-directional drilling.
Lim, who doubles as CGS International’s deputy group head of research plus head of research for the Singapore team, joined the brokerage in 2006 following stints as an auditor with what was called PricewaterhouseCoopers and then Andersen Singapore.
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When Lim started as an analyst, the oil and gas industry was bustling, even relative to the buoyant overall market at the time. Alongside dozens of supporting players, Sembcorp Marine (SembMarine) and its parent company, Sembcorp Industries , were key players in the sector.
At the time, Keppel was primarily recognised for its offshore and marine unit despite also holding interests in property, telecommunications, and power generation. CIMB-GK Securities, as it was then known, needed someone to help “complete the picture”, and with her experience in Sembcorp Industries’ investor relations team, Lim has a certain advantage.
In a somewhat similar vein, the O&M survivors today that can offer value to new customers in the renewable space are those with the advantage.
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For example, Seatrium — formed via the merger of SembMarine and Keppel’s O&M unit — was riding on the fossil fuel industry with their rigs and FPSOs, or floating production, storage and offloading vessels. Today, Seatrium has been channelling its expertise to support the production of renewable energy and is also playing up its key but understated role in repair and maintenance.
The world at large recognises the need to go green, but immediate demand for fossil energy means this shift is going to be a slow grind instead of an overnight switch. The focus on shiny solar panels grabs headlines but the unsavoury business of lifting crude oil from below the seabed is still essential in meeting growing energy needs.
If spending in the oil and gas sector rises again, these companies can revert to their core strengths, as that is what they excel at, notes Lim. However, with their shift towards renewable energy, they are also well-positioned to capitalise on any capital expenditure related to wind turbine installation vessels or new energy projects.
Locally-listed companies that have managed to position themselves in this “sweet spot” include small and mid-caps, the likes of Marco Polo Marine and Pacific Radiance .
Vessels, once employed to support fossil fuel explorers and producers, can be repurposed to assist offshore wind farms. This means investors should not overly fixate on pinpointing the peak of the oil and gas cycle, as a broader range of industry dynamics is now in play. “Singapore companies have to be nimble and improve their product offering,” she says.
The need to stay nimble is an increasingly critical attribute as this industry is now more politicised than before. “Under different administrations, there would be a focus on [the] renewable energy [sector], and then under Trump, they are actually stopping new investments in renewable energy,” says Lim.
She adds: “In the long term, they complement each other as fossil fuels would reach peak oil and see depleting resources. As such, [these same companies] will have to channel into new energy, new energy spots.”
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Shipping rates
By extension, Lim also covers the shipping sector. She believes the industry won’t experience a repeat of the rate peaks seen in 2021 and 2022, as the pandemic largely drove those.
However, she expects shipping rates to remain “slightly higher” than they were 10 years ago. The industry is also embracing the shift towards greener practices. This transition takes time, as new vessels running on cleaner fuels are costly and require time to build. With steady demand for shipping capacity, rates are therefore expected to remain firm.
“If you look at container ships, we’ve had many years of a weak freight index. Then Covid-19 came, and global supply chains were disrupted. Other investments in the container ship sector had spurred the demand for newbuild,” adds Lim.
“So, of course, the liners had to be profitable before they started to spend. The liners had profits made after Covid from 2020 to 2022, where freight rates went up significantly due to the reasons mentioned above. Margins improved, and profitability was high for liners, which meant they could renew their ships and spend on new ships.”
At the same time, the sector has its International Maritime Organization (IMO) regulations, which led to shipowners investing in green vessels. The cycle actually helps to sustain the entire industry, says Lim.
“Having said that, liners have to be profitable before they can talk about investing in a new fleet. If, say, global trade comes into a big disruption or a major slowdown in global trade, then the freight index will come down. It depends on global trade.”
Shipping politics
Much like the semiconductor sector, the shipping and shipbuilding industries now find themselves caught in the crosshairs of geopolitics. As part of his effort to revive the US shipbuilding industry, Trump has proposed imposing levies on ships built in China that dock at US ports. The majority of boats built today are from South Korea or China. This proposal sent shares of China-based, Singapore-listed Yangzijiang Shipbuilding plummeting by nearly a third from Feb 20 to March 14 before recovering slightly.
In a sense, Lim is backing her best call in recent years. Prior to the sell-off triggered by the proposed US port fees, Yangzijiang Shipbuilding had performed strongly over the past 12 months. Its share price had risen by around 80%, making it the best-performing stock under her team’s coverage since before the pandemic.
The China-based shipbuilder has been expanding its capabilities to construct greener energy vessels that run on cleaner fuels, moving beyond its traditional focus on container ships powered by fossil fuels. Yangzijiang Shipbuilding has amassed an order book worth US$24.4 billion ($32.6 billion), ensuring its yards remain full until 2027. In addition to reporting higher earnings, the company is rewarding shareholders with a final dividend of 12 cents, nearly double the 6.5 cents paid for the previous FY2023.
Following the results announcement on Feb 26, Lim has kept her bullish target price of $3.62 in her Feb 27 note, which was earlier raised from $3.20 in January, suggesting that there are more legs for this counter given its March 26 closing price of $2.42.
Investment worthy
Driven by companies like Yangzijiang Shipbuilding and three other index heavyweights — the three local banks, DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank — the Straits Times Index (STI) has had a strong year so far. The local market benchmark reached a 17-year high of 3,886.98 points on Jan 8 before reaching a new level of above 3,900 points in February. As of March 26, the STI closed at another all-time high of 3,963.71 points.
Lim, who covers the three local banks as well, believes that despite all their share prices at or near record levels, they are worth considering, especially when there are pullbacks. The positive attributes of the banks are not necessarily for the capital gains but for their generous yields of more than 5% or more.
The CGS International team has also selected other notable picks for this year, including blue-chip stocks such as Seatrium, Sembcorp Industries, Singapore Technologies Engineering (ST Engineering), Singapore Telecommunications (Singtel), as well as building material supplier Pan-United Corporation.
Photos: Albert Chua/The Edge Singapore
