Offshore and Marine Sector Research Report

by CIMB-GK RESEARCH (21 Oct)

IS the bubble bursting? Offshore & marine stocks have been under pressure for several months, falling by more than 70 per cent YTD.

The drop mirrors falling oil prices on the back of a troubled economy and shrinking demand, worsened lately by tight global credit which has increased insolvency risks among shipowners and offshore operators. Singapore big caps in the offshore & marine sector - SembCorp Marine and Cosco Corp - have not been spared in the stock sell-down.

We see more frantic sales of unchartered assets in the market where operators are pushing back their newbuild plans and starting to look for bargain units built for speculation.

A recent decision by Atwood Oceanics not to exercise its option for a third semi-submersible with Semb- Marine could be a key sign of the start of a rig downcycle. While we had expected orders to slow down even before the credit crisis, it now looks like the credit turbulence could hasten the slowdown of orders going into 2009.

Earnings growth for 2009 has been secured by orders but growth beyond that could be at risk if the order momentum decelerates faster than expected.

The adverse credit market has triggered occurrence of bankruptcies, unstable credit lines and higher lending spreads. We are cutting our order assumptions for 2009-10 by 13-44 per cent for SembCorp Marine. With our blanket cut, we are downgrading our earnings estimates by 6-12 per cent for SembCorp Marine.

Downgrade sector to 'neutral' from 'overweight'; SembMarine remains our top pick. Maintain 'outperform' on SembCorp Marine as it is trading below its 10-year trough valuation of about 10x P/E.

Maintain 'underperform' on Cosco.

-Research Report by CIMB-GK RESEARCH (21 Oct)