Merrier times ahead for sector
Signs such as stabilising oil prices are pointing to a rebound for Singapore's maritime industry
The tide may finally be turning for the maritime sector.
Despite the waves of bad news that have hit the industry - the oil price slump, global financial crisis and closures of shipyards worldwide - some investors are seeing pockets of opportunities.
The prices of some maritime stocks on the Singapore Exchange (SGX) have continued to rebound despite downward revisions in earnings in the last quarter, noted SGX in a briefing last week.
The benchmark SGX Maritime and Offshore Services (MOE) Index also rallied close to 20 per cent from its trough last September, along with the recovery of crude oil prices.
The index, free-float market capitalisation-weighted, measures the performance of listed MOE companies here.
It consists of 18 companies with a combined market cap of over $30 billion.
Last year, these companies averaged a market capitalisation-weighted total return of -10.6 per cent.
But this year has shown some promise - the year-to-date total return is 6.1 per cent.
There is a risk of prices rising more sharply by 2022 if the spare production cushion is eroded.International Energy Agency report on oil
A third of these 18 constituents operate shipyards - namely Keppel Corp, Sembcorp Marine, Yangzijiang Shipbuilding, Vard Holdings, Nam Cheong and Triyards Holdings.
The performances of these six stocks in the year thus far has been mixed, ranging from a 8.7 per cent gain for Sembcorp Marine to a 11 per cent decline for Nam Cheong, according to an SGX report last month.
And just like the Singapore economy, the industry performed slightly above expectations last year.
In 2016, the local transportation and storage sector grew 2.3 per cent, mainly supported by the water transport segment, according to latest Ministry of Trade and Industry (MTI) figures.
Overall sea cargo volumes rose 10 per cent in the fourth quarter, bolstered by a 26 per cent surge in oil-in-bulk shipments.
Although container trade fell marginally by 0.1 per cent last year, it was a dramatic improvement from the 8.7 decline in 2015.
Nonetheless, the marine and offshore sector is still expected to continue facing headwinds this year, said MTI, when announcing the gross domestic product forecast last month.
For instance, shipyards with excess yard capacity is an issue that needs to be resolved, noted a Feb 7 SGX report.
As a result, there is rising pressure on shipyards to restructure or merge to derive greater cost savings and compete with global peers, it added.
But analysts are expecting shipyards with sound fundamentals to emerge stronger from this downturn.
Companies with net cash or operating cash flows are likely to survive the crisis, said SGX at last week's briefing.
Investors can also look out for order book momentum - new contracts and projects are a promising sign of a company's health.
And there are several opportunities for investors seeking bargain stocks on the SGX.
For instance, current valuations are undemanding, with shipyard stocks such as Yangzijiang Shipbuilding trading at 0.7x P/B, which is a 22 per cent discount to the global financial crisis trough of 0.9x P/B.
PB ratios are one of the valuation metrics used to value the MOE Sector, especially when earnings may be depressed or negative, which may result in abnormal or unavailable price-to-earnings ratios.
Much of the optimism for the sector's revival can be attributed to the recent stabilisation of oil prices.
After reaching a record low of US$25 per barrel last January, it stabilised to US$50 to US$55 levels due to ongoing supply cuts led by members of the Organiation of Petroleum Exporting Countries.
Most analysts expect the price to be further boosted to US$55 to US$60 per barrel by the end of the year.
In the long term, oil demand is expected to grow strongly until at least 2022 with the main developing economies leading the way, according to the latest International Energy Agency (IEA) report, which was released on Tuesday.
The IEA, which studies oil trends, also noted that the fall in oil prices over the past two years has resulted in an unprecedented drop in investment for upstream projects, which would then affect production capacity.
"There is a risk of prices rising more sharply by 2022 if the spare production cushion is eroded," noted the report.
With current oil prices stabilising, the consensus is for the sector to return to profitability in the next three years as forward return on equity turns positive, said SGX.
Although downstream industries such as shipyard owners are likely to lag the oil price recovery because of their position at the bottom of the supply chain, they can perhaps find some relief with government support.
The survival of the MOE sector is crucial as it builds on Singapore's strength as an international maritime hub.
MTI announced last November some enhancements to IE Singapore's Internationalisation Finance Scheme and the re-introduction of Spring's Bridging Loan to support the sector and facilitate MOE companies' access to working capital and financing.
During the recent Budget, the Government also deferred the Foreign Worker Levy increase for the marine sector, which is heavily dependent on foreign manpower.
Looking ahead for SGX'S 3 biggest shipyard stocks
Shipyard stocks have been subjected to more volatility than most market segments recently, particularly with the debt servicing focus on South Korean shipbuilders last year.
Singapore's three biggest listed companies that operate shipyards are Keppel Corp, Yangzijiang Shipbuilding and Sembcorp Marine. Their shipyards are located in Singapore, China, Indonesia and other parts of the world.
Here are their expectations for the year:
Keppel Corp reported its yards will continue to focus on executing existing and new contracts well, and is expecting to deliver some 20 new build and conversion projects. It has reduced its shipyard workforce in addition to cutting yard capacity by mothballing two overseas yards, and is in the process of closing three of its seven yards here.
It noted Keppel Shipyard was on track to deliver its first Floating Production Storage and Offloading (FPSO) vessel for the year. It will be delivered to Yinson Production (West Africa) on time and on budget.
Its president and chief executive Wong Weng Sun noted in a briefing on Feb 22 that it had not taken additional impairment charges as "the current provisions are adequate under the present circumstances". It made a $280 million provision for foreseeable losses on contracts work-in-progress and a $329 million provision for the Sete Brasil contracts in FY2015.
Increasing inquiries for non-drilling solutions will see an "earlier recovery in demand for fixed platforms, FPSO and Floating Storage and Offloading conversions and new-builds in the next few years".
It is also diversifying into liquefied natural gas.
Yangzijiang Shipbuilding, the largest private shipbuilder in China, secured new orders for three units of 1,900 20-foot equivalent unit containerships last September, and new shipbuilding orders of US$650 million (S$919 million) in total, year to date. Its outstanding order book stood at US$4.4 billion as at the end of last September, comprising 85 vessels, and it would keep optimal use of yards' facilities through to 2019. - SOURCE: SGX