Ezra - Additional charters reinforce strength in core operations

Ezra announced that it has secured new and renewal charter contracts worth US$152 mn for three Anchor Handling, Towing and Supply Vessels (AHTS). Under the agreements, the vessels will be chartered out for operations in Southeast Asia for periods ranging from 5½ to six years, inclusive of extension options. We believe the group's young deepwater fleet (about 78% of Ezra's fleet is deepwater capable) places them in a strong position for further new contract wins. The AHTS vessels are basic workhorses of the offshore oil & gas support services industry that are deployed throughout the entire oil field life cycle. Ezra has an existing modern fleet of 25 AHTS and 3 crew boats within the Offshore Support Services division (original core business of the group).

With recent signs of recovery from the financial turmoil, the group foresees upward revisions in capital expenditures by global oil majors, driving strong demand for offshore support services. This is in line with our positive view on the O&M/offshore services sector, especially in the subsea space.

Ezra's recent new growth strategy announcement on the subsea market marks a strategic and transformational move to focus on one of the fastest growing segments of the O&M sector. Global subsea spending in the next five years should rise >70% over the previous five years. Subsea spending should total about US$160bn from 2009 to 2013, and 3,222 subsea trees are due to be installed during this period. With its upcoming high specification vessels, enhanced know-how and expertise, and good execution track record, Ezra should be in a strong position to benefit in our view. We maintain our Buy on Ezra for its attractive valuations, strong execution track record, and its move into the high growth subsea market.

Sponsored Links

CH Offshore: Deeply undervalued cash

AHTS fleet with deepwater focus. CH Offshore (CHO) owns and operates eight small AHTS (<8,000>12,000 bhp) as of end FY09 (FYE June). CHO will increase its fleet of large AHTS to seven by end FY10.

Strong free cash flows amidst steady earnings growth. We project CHO’s free cash flow per share to rise to 8.5 US cents in FY11 (or equivalent to c. 22% of current share price), vs. 2.5 US cents in FY09 and an estimated 1.1 US cents in FY10. This is due to: 1) Non-existence of committed capex after FY10, and 2) our forecast of 7% net profit CAGR in the FY10-11 forecast periods.

6.5% current FY10 dividend yield. We expect CHO to have 40% dividend payout, vs. recurring net profits, in the FY10-11 forecast periods. The 22% dividend payout in FY09 amidst uncertain economic condition is an anomaly.

Sustained undervaluation could trigger M&A interest. CHO now trades at 6x recurring FY10 PE (FYE June), vs. 9x average PE for the small-mid cap offshore service providers in our coverage. CHO is also not seen as a core holding for Chuan Hup, its second largest shareholder. Hence, in our opinion, an undervalued CHO may be an attractive M&A target for global AHTS owners, including John Fredriksen’s Deep Sea Supply (which has close to 5% stake in CHO).

Initiate coverage with BUY. Our fair value for CHO is S$0.89, based on 9x blended recurring FY10/11 PE (FYE June). This gives around 58% potential upside from current price. We initiate coverage on CHO with a BUY rating.

Rickmers Maritime - 2Q09: Retaining cash to weather challenges ahead

RMT reduces distribution policy from 46% to 13% for financial flexibility and declares DPU of 0.6 US cents. While fair price of S$0.76 is 30% above current price, we maintain HOLD in view of the US$712m unfunded capex.

Rickmers Martime (RMT) posted a net profit of US$5.2m for 2Q09 (-43% yoy; -53% qoq). The fall in earnings was mainly due to the provision of US$7.5m for asset impairment charged for a vessel (Maersk Djibouti) as the charterer, Maersk Line, may exercise an early termination option. The impairment also takes into account the likelihood of a fall in charter rates in 2010. Excluding the provision for impairment, 2Q09 earnings would be US$12.7m (+38% yoy; +15% qoq). According to management, this is the only vessel in RMT’s fleet that has an early termination option.

The trust’s income available for distribution amounts to US$19.6m (+42% yoy). RMT is paying DPU of 0.6 US cents, or 13% of distributable cash flow (1Q09: 46%). A reduction in its payout ratio is mainly to conserve cash for financial flexibility amid uncertainties in the container shipping market.

To date, RMT has a fleet of 16 containerships time chartered out for periods of between seven and 10 years. Three more 4,250-TEU newbuilds, contracted to Hanjin Shipping, are expected to join its fleet. Of these, two are scheduled for delivery in 2H09 and one in 1Q10. RMT is evaluating options for the funding of four 13,100-TEU container vessels worth US$712m to be chartered out to Maersk in 2H10. These vessels have secured 10-year charter contracts at a daily time charter rate of US$56,941. The trust is also seeking to re-finance a US$130m loan facility due in Apr 10.

While our fair price of S$0.76 is 30% above its current share price, we maintain our HOLD recommendation in view of RMT’s unfunded US$712m capex due in 2010. Our fair price is based on 2010 P/B of 0.4x, similar to US peer Danaos’ P/B of 0.4x as RMT would have a similarly very high gearing of 4.0x, assuming debt financing for US$712m capex.

FSL Trust: LTV covenant clouds dissipate

Secures covenant waiver. FSL Trust has secured a two-year waiver for the loan-to-market value covenant in its credit facility. The waiver, subject to documentation, will extend until the end of 2Q11. During this period, the minimum coverage ratio of the charter-free fair market value of the trust's portfolio over its outstanding indebtedness will be reduced from 145% to 100%. In return, FSLT must repay US$8m per quarter during the two-year period (or US$64m in total). The trust has already prepaid US$12m voluntarily. Margins over US$ LIBOR also increase by between 50 and 70 basis points (bps) during the period. The margin increase is reduced to a 25-bp hike after the waiver period.

Re-affirms DPU guidance. The manager estimates that the additional interest expense during the waiver period averages US$0.7m per quarter. The manager re-affirmed its DPU guidance of 1.5 US cents per quarter. We estimate this works out to a payout of less than 50% of cash earnings. We note there might be some one-off expenses (both cash and non-cash in nature) in 3Q09 as FSLT is likely to re-align its interest hedges to reflect the new amortization schedule.

T&Cs as expected with some positives. The conditions and pricing were in line with our expectations. We were expecting US$35m annual payment (versus US$32m actual). We were off by about 5 bps in our cost of debt assumptions. The positive surprise was the lower margin increase postwaiver period (we were not so optimistic). The new minimum coverage ratio is fair in our view, especially with outstanding indebtedness falling as quarterly loan repayments are made. The 'official' current fair market value of the portfolio was not disclosed.

Remains our top sector pick. A major overhang has eased, taking pressure off the manager and the stock. Industry concerns remain but we like the new, more sustainable payout model and FSLT's diversified vessel mix. We reiterate that unitholders should constrain their expectations regarding DPU growth; with the new payout model, a significant DPU increase would require acquisitions (and fresh equity) in our view. Note this is a revolving credit facility, so FSLT has the option to tap into the undrawn amount as it grows with each periodic repayment. Our discounted FCFE value is up from S$0.84 to S$0.86, incorporating actual waiver terms. Our fair value estimate edges up a cent to S$0.77, reflecting an "industry uncertainty" discount of 10%. Maintain BUY.

Value Mercator at S$0.42

Mercator mentioned in its results briefing that there was expiration of long term contracts and the contracts were renewed at lower rates. This was a concern as up to 70% of its revenue was from long term contracts. Moreover, spot market rates had declined sharply from last year that affected up to 30% of its revenue. Despite the difficult operating conditions, Mercator was able to report a profit compared to most of its peers that incurred losses.

Due to the fall in dry bulk shipping rates, net profit is expected to decrease to US$45.4m in FY2010F. After that, rates are anticipated to gain slightly with the increase in demand for shipping. This is likely to cause the profit to rise to the same amount of US$48.1m for FY2011F and FY2012F.

Recommendation. We value Mercator at S$0.42, which is 1.0 time book value for FY2010F. We expect Mercator to report a profit for the next three years despite the tough conditions in the dry bulk shipping industry. This is attributed to its ability to maintain long term contracts with its customers. Given the recent correction in the share price, we upgrade the stock from hold to buy as there is upside of 23.5% to its fair value.

First Ship Lease Trust - Placement to fund acquisitions

FSLT proposed a placement of up to 100m shares (19.3% of existing share capital) at an issue price of between S$0.525 and S$0.575/share to fund its vessel acquisitions. Maintain HOLD. Yields are intact but bullet payments are not too far away.

First Ship lease Trust (FSLT) has proposed a share placement of up to 100m new units at an issue price of between S$0.525 and S$0.575 each, or not more than a 20% discount to S$0.59. Assuming 100m units (19.3% of existing share capital) are issued at S$0.59 each, the proceeds of S$59m will be used for vessel acquisitions.

FSLT has recently reaffirmed a quarterly DPU of 1.5 US cents from 3Q09 onwards. Based on a placement price of S$0.59, we estimate cost of equity at 14.6%, which seems high. While it is difficult to estimate the effect of FSLT’s proposed vessel acquisitions, shipping trusts generally do not undertake acquisitions that are not accretive. However, the management is targeting for a gross asset yield of 15% p.a.

While FSLT’s lessees have been making lease rental payments promptly, we do not rule out the risk of default by its charterers.
Although FSLT did not apply the distribution reinvestment scheme (DRS) for 2Q09, the scheme has a dilutive effect on its DPU and yields. No change to our earnings forecast as the placement price and the number of new units to be issued have not been determined.

Reiterate HOLD and maintain our fair price of S$0.64 based on 0.8x 2010F P/B of the container shipping sector. We suggest entering at S$0.52. Reasons for maintaining HOLD.

Mercator Lines to report a profit for the next three years

Mercator mentioned in its results briefing that there was expiration of long term contracts and the contracts were renewed at lower rates. This was a concern as up to 70% of its revenue was from long term contracts. Moreover, spot market rates had declined sharply from last year that affected up to 30% of its revenue. Despite the difficult operating conditions, Mercator is able to report a profit compared to most of its peers that incurred losses.

Due to the fall in dry bulk shipping rates, net profit is expected to decrease to US$45.4m in FY2010F. After that, rates are anticipated to gain slightly with the increase in demand for shipping. This is likely to cause the profit to rise to the same amount of US$48.1m for FY2011F and FY2012F.

Recommendation. We value Mercator at S$0.42, which is 1.0 time book value for FY2010F. We expect Mercator to report a profit for the next three years despite the tough conditions in the dry bulk shipping. This is attributed to its ability to maintain long term contracts with its customers. Given the recent correction in the share price, we upgrade the stock from hold to buy as there is upside of 23.5% to its fair value.

ASL Marine - Strong enquiry of offshore orders

We recently hosted a postresults briefing for ASL. Investors’ concerns centred on declining shipbuilding orderbook, competition arising from other repair yards and whether shipchartering activities could be sustainable. Management reassured that it is receiving a healthy level of newbuild and repair enquiries, driven by increased offshore activities. While we do not anticipate sudden pick-up in newbuild orders for this year, we believe this has been priced in. With the expansion of Batam yard to be fully completed by Mar 10, we believe ASL will be one of the key beneficiaries for repair work of an enlarged fleet globally. Ascribing P/E of 6x to FY11 EPS, we derive our target price of S$1.41. Maintain BUY.

Management is receiving healthy enquiries for newbuilding of high capacity tugs and offshore construction vessels. We understand that these offshore vessels are in demand, given the increased offshore drilling activities in Australia (Western Australia’s Gorgon Gas project) and Indonesia (Timor Sea, Sumatra). Hence, we believe this will be positive for ASL. However, management acknowledges that due to fewer orders and tighter competition, the margins of new orders may be compromised, going forward.

Batam’s yard capacity to increase by 70% in deadweight tonnage in Mar 10. ASL’s Batam yard is currently adding two drydocks and a graving dock as well as lengthening its finger pier. When the upgrading work is completed in Mar 10, ASL’s yard capacity would increase by 70% dwt and be able to accommodate the repair and conversion works of larger vessels. Management is optimistic on the long-term outlook, underpinned by an increasing global fleet and regulatory requirements.

Shipchartering. ASL has a current fleet of 189 vessels with an average age of six years. ASL is currently building 11 vessels internally and a vessel externally to add to its chartering fleet, which will increase to a fleet of 201 vessels by FY10.

Ezra - Attractive deal not requiring incremental capex

Ezra has announced a profit sharing agreement to operate four new anchor handling, towing & supply (AHTS) vessels without incurring any major capital outlay. Under the vessel operating agreement, Ezra will manage these vessels for an offshore specialist fund in return for a half-share of the profit earned, after deducting direct operating expenses from the charter revenue. The vessels are still under construction, with the first AHTS slated for delivery in 1Q 2010. The AHTS vessels are basic workhorses of the offshore oil & gas support services industry that are deployed throughout the entire oil field life cycle and will complement the group's existing fleet of 25 AHTS and 3 crew boats within the Offshore Support Services division (original core business of the group).

We view this deal positively as it does not involve additional capex, yet the group will still be able to recognise half the profits. We think the assets were ordered in the past on specualtion by the specialist fund; but as they do not have the expertise in running these vessels, they now require the services of players like Ezra. On a steady state, assuming all four vessels are operating for a year, we estimate earnings contribution to Ezra per annum could range from US$2-3mn. While the amount is not large compared to overall group earnings, this deal could be a prelude to further of such arrangements, which appears attractive considering the minimal capital outlay.

We maintain our Buy on Ezra for its attractive valuations, strong execution track record, and its move into the high growth subsea market.

FSLT raises S$41m via private placement at S$0.525 per unit

Pursuant to the placement, First Ship Lease Trust (FSLT) will issue 80m new units (15% of existing issued Units) at S$0.525/share.

The net procceds of about S$40.9m, after the placement fee and estimated offering expenses, will be utilised to fund vessel acquisitions.

FSLT has not identified any specific assets to be acquired with the net proceeds.

FSLT has recently reaffirmed a quarterly DPU of 1.5 US cents from 3Q09 onwards which implies an annualised yield of 14%.

While it is difficult to estimate the effect of FSLT's proposed vessel acquisitions, shipping trusts generally do not undertake acquisitions that are not accretive. However, the management is targeting for a gross asset yield of 15% p.a.

Reiterate HOLD and maintain our fair price of S$0.64 based on 0.8x 2010F P/B of the container shipping sector. We suggest entering at S$0.52.

Reasons for maintaining HOLD:
a) EBITDA yield of 36% p.a. is still intact.
b) Accretive acquisitions will boost its distributable cash.
c) However, although FSLT has begun repaying part of its loans on a quarterly basis, it still has outstanding loans of US$400m due for balloon payments in 2012 and 2014. It will either have to refinance or raise equity. The latter would likely lead to a yield dilution. If FSLT were to raise US$400m at the current share price of S$0.61, this would imply a mere yield of 5.6% p.a. (before accretive acquisitions).

ASL Marine and Yangzijiang among 12 constituents to form new Maritime Index

ASL Marine and Yangzijiang are among the 12 constituents of the new FTSE ST Maritime Index launched by Singapore Press Holdings (SPH), Singapore Exchange Limited (SGX) and FTSE Group (FTSE).

FTSE ST Maritime Index – ASL Marine Holdings, Cosco Corp, Courage Marine Group, First Ship Lease Trust, Jaya Holdings, JES International Holdings, Mercator Lines, Neptune Orient Lines, Rickmers Maritime, STX Pan Ocean, Swissco International, Yangzijiang Shipbuilding Holdings.

The index reflects the strength of the maritime component of companies in the energy, offshore and shipping industries listed on SGX; underlines the Exchange’s efforts in enhancing this sector.

The FTSE ST Maritime Index comprises 12 companies that have at least 55% of their revenue derived from maritime related activities including the manufacturing, ownership, operation and repairing of commercial and/or cargo vessels.

The new index provides investors and analysts a benchmark tool to track and measure the performance of SGX listed companies in the maritime industry that meet the indexing standards required by international investors.

Yangzijiang Shipbuilding - Holding up well in a tough environment

Established shipbuilder in the PRC. Yangzijiang Shipbuilding (Holdings) Ltd (Yangzijiang) is an established shipbuilder in the PRC with operations dating back to the 1950s.The group operates two yards in Jiangsu province, one in Jiangyin city and the other in Jingjiang City. Yangzijiang has delivered more than 100 vessels including bulk carriers and containerships and is looking to expand its product range as well. In 2Q09, group revenue rose 41% YoY to RMB2.5bm while net profit rose 80% to RMB607.4m, aided by higher gross margins and other gains.

Large order book with no order cancellations so far. Yangzijiang has a strong order book of 139 vessels worth a total of US$6.1b as at 30 Jun 09. This comprises 66 containerships worth US$3.8b and 73 bulk carriers worth US$2.3b. More noteworthy is the fact that management said that the group has not received any order cancellations so far while peers such as Cosco Corp have been hit. We do not discount the possibility of order cancellations, but order delays are more likely, given the group's determination to preserve orders.

Gross margins have held up. Despite tougher business conditions, the group's gross margins have held up with the construction of higher margin vessels (24% in 2Q09 and 20% in 1Q09). This compares with 1% shipbuilding margin for Cosco in 2Q09, which was affected by longer-thanexpected delivery delays and higher-priced raw materials. However the shipbuilding industry is now out of the boom period and normalised margins are expected to fall in the long run.

Looking at new areas amid weak orders. The last time that Yangzijiang received new orders was in 2Q08, and management expects minimal new orders given low demand and customers' difficulties in securing financing. Hence, the group is proactively looking into new areas such as the vessel scrapping market which is relatively buoyant now. We view this possible development positively, given the resulting business model.

Initiate with BUY. We initiate coverage on Yangzijiang with a BUY rating with fair value estimate of S$1.20 based on 11x blended FY09/10F earnings, in line with peers. Project execution has been good with relatively strong margins compared to peers. Its strong order book of US$6.1b which extends to 2012 also lends earnings visibility though we note that new order flow may be minimal going forward. We have not factored in possible contributions from the vessel scrapping business.

Ezion - More upside to our target price of S$0.99

Ezion’s key strength is to identify opportunities within the offshore industry, and then to finance, design, procure and modify specialised vessels which it then charters out, at premium margins.

Currently, Ezion derives the bulk of its earnings from ballastable vessels, which serve as support vessels for offshore projects. Going forward, earnings will be boosted significantly by the addition of 4 self-propelled jack-up support rigs (aka liftboats) to its fleet of vessels.

Ezion also recently won an A$350m contract for early-stage work in the development of Western Australia’s massive Gorgon natural gas project. We anticipate more jobs to come from this project, which has an estimated capex of at least US$28bn.

Ezion’s share price has moved up sharply on the back of positive news flow such as the Gorgon contract win. However, we believe its prospects have not yet been fully reflected in its share price. Despite FY09 valuations of 35.9x, PE to Growth is still just at 0.33x. We expect further 28% upside to our target of S$0.99, which is based on 15x FY10 earnings.

ASL Marine: Creditable FY09 results. Maintain BUY

Results largely in line with expectations. ASL Marine Holdings (ASL) turned in a good set of results amid a slowing industry. Although results were lower sequentially on the back of lower revenue growth and impairment loss on vessels of S$3.2m, revenue rose 8.7% YoY to S$435.4m and net profit rose 17.9% to S$71.1m for FY09. Shiprepair and shipchartering revenue were in line with our expectations for 4Q09, but shipbuilding revenue was lower than expected due to lower revenue recognition as certain work-inprogress had yet to reach the 10% recognition threshold during the period. Revenue and net profit met 96% and 94% of our full-year estimates respectively.

Minimal new orders, but ASL is diversified. As mentioned in our earlier reports, new order flows were minimal and this is evident from the group's lower order book of about S$523m compared to S$582m in 3QFY09. However, this order book figure does not include eleven vessels (worth S$58m) that the group is building internally to expand its ship chartering fleet. It is encouraging that demand for shiprepair and chartering are still holding up, which is good news for the relatively diversified group (shipbuilding, repair and chartering accounted for 33.8%, 27.5% and 38.7% of FY09 gross profit respectively).

Cautiously optimistic outlook. We are cautiously optimistic on the shiprepair and chartering sectors, and believe that the medium to longer term outlook is bright. Management revealed that value per contract for the ship repair segment fell this quarter but the group repaired more vessels, hence the healthy results for this segment. The group is also expanding Batam facilities to cater to more ship repair activities and this will be completed in 3QFY10. Ship chartering, though affected by lower charter rates, still has a positive outlook due to demand from domestic infrastructure, construction and land reclamation projects and offshore oil and gas activities, amongst others.

Fair value raised to S$1.18. As guided by management, we are expecting lower but still healthy earnings for FY10, barring unforeseen circumstances. The stock has risen about 30% since our last report, and though the spread between ASL and its comparable peers has narrowed, it is still trading at about 5x FY10F earnings compared to its peers' average of 11x. Based on 7x FY10F core earnings (prev. 6x), we are raising our fair value estimate to S$1.18 (prev. S$1.03) for ASL Marine and our BUY rating remains.

Sembcorp Marine has terminated one contract with Petroprod

Sembcorp Marine has terminated its contract with Petroprod D&P I Ltd for the construction of a jack-up rig, as milestone payments due under the contract have not been received. The jack-up rig is a harsh environment drilling rig and is one of the world’s largest jack-up rigs. SMM says that there are alternative buyers who are interested in this rig, and they are confident that it will be able to receive all amounts it should have earned with the sale of this rig.

The rig was contracted in 2007, is expected to be completed in mid-2010, and has a value of US$442m. Petroprod is a member of Norway’s Larsen Group, and we understand that it is being put in liquidation. We also understand that Petroprod has one other order with SMM, for the conversion of a tanker to an FPSO.

On June 8, SMM had announced that it had sold the semisubmersible PetroRig I to Diamond Offshore in order to recover monies due to them following the non-payment by the customer, Petromena. Petromena similarly has ties to the Larsen Group. Petromena also has two more semi-submersibles under construction with SMM.

This latest development is indicative of our ongoing concerns for potential cancellations and defaults that SMM faces. Although SMM has so far been protected via progress payments and still-buoyant pricing for rigs, the elevated risk is one of the reasons for our muted outlook on the stock. We are keeping tabs on more potential cancellations, and maintain our Hold recommendation to target price of S$2.91.

SembCorp Marine - The tide is rising

Investors appear impressed by the strong operating margin (10.5% for 1H09). SMM feels confident it will be able to maintain this level of margin and pointed out that profit contribution from orders negotiated at better pricing could even see margins inch up. We forecast 10.6% for FY09 and 11.2% for FY10 and note upside risk to our forecast as it is still a builders’ market.

Not surprisingly, Petrobras’ plans for 28 drilling rigs and 8 FPSO units merited lots of attention. While agreeing that Petrobras would indeed be one of the larger potential customers, the company took pains to point out that current oil prices will likely result in orders from the Middle East (Saudi Aramco, Iran NOC) & North Africa (Egypt), China as well as Mexico (Pemex). High levels of drilling activity in West Africa will also generate incremental demand for deepwater rigs and production units.

Asked about their plans for the S$1.8bn net cash balance (S$600m excluding S$1.2bn customer advances) and low gearing, SMM hinted at a “near customer” strategy, which we believe points towards asset acquisition/equity partnership in Brazil. In the medium to longer term, consolidation of the yard network is likely, with a focus on efficiency gains and streamlining of operations.

Our target price of S$3.25 would increase to S$3.43 if we took Cosco Corp’s current share price into account, pointing to 11.2% upside. At 8.9x FY10 PER, the stock is trading below its 5-year average PER of 13.5x despite continued strength in execution and strong balance sheet. Further, we expect 2010 to offer more promise as regards order wins. Maintain OUTPERFORM.

ASL Marine - No new shipbuilding orders since October

ASL Marine posted a robust set of FY09 results – excluding a doubtful debt provision and impairment loss totalling S$7.6m, the numbers were bang in line. FY09 net earnings were S$71.0m, up 17.9% over FY08. Without disposal gains, however, earnings were flat at around S$41.0m. ASL proposed a final dividend of 3cts per share, unchanged from FY08.

Revenue for the group grew by 8.7% to S$435.4m, boosted mainly by its shipbuilding segment, which grew 10.5%. Shiprepair remained steady, while shipchartering grew by 9.4%. Overall margins have also been sustained, which is especially pertinent for shiprepair, which is facing difficult operating conditions in the current weak market environment.

ASL has managed to sustain its shiprepair revenues especially in the final quarter. However, while the number of ships repaired has increased, the average contract size has declined. Going forward, management says it needs to work harder in order to secure customers, but we believe that erosion in revenues and margins is inevitable.

ASL has also not secured any new shipbuilding orders since October 2008, but is currently working on its existing orderbook of S$523m. Management’s reading of the market is that it does not expect to receive new orders until the credit situation improves. Under these conditions, we are conservatively not expecting any new shipbuilding orders and therefore factoring in a 60% decline in the segment’s revenue from FY12.

Ship chartering revenues will be propped up by the addition of 12 vessels, and better rates on timecharters, but these can be volatile. We are leaving our FY10 core net profit forecast unchanged at S$45m, for a YoY pick-up of 10%. ASL is still trading at compelling valuations of 6.8x FY10 earnings. We maintain our BUY recommendation, to our target price of $1.62, in line with peer average of 10x PER.

Ezion Holdings: Positive development for Gorgon

Gorgon clears state government regulatory hurdle. It was reported this week that the Western Australian government has granted final state government's environmental approval for the Gorgon project, with the Australian Federal government's approval as the final regulatory hurdle remaining. This is a positive development, as the Gorgon project has been delayed several times in the past years. We believe that the Federal government's approval is a formality, and the market's anticipation of this news could be a near term price catalyst.

Earnings risks still exist, albeit reduced. While this Gorgon project development has reduced a major earnings risk to Ezion, we note that two of the group's four liftboats are still under MOUs. While Ezion has a firm bareboat charter contract with Ezra Holdings for the other two liftboats, the latter has yet to announce firm time charter contracts for these vessels and may still request for vessel delivery delays.

Better-than-expected 2Q09 results. Ezion's recurring net profit came in at S$4.5m (+103% y-o-y) in 2Q09, on revenues of S$21.1m (+195% y-o-y), mainly due to an expanded vessel fleet. The outperformance vs. our estimate of S$3.5m is attributable to greater contributions from the Marine Services division and lower than expected start up costs for the Gorgon project. We have hence raised our FY09 recurring net profit forecast by 18% to S$15.0m to factor in these deviations.

Raising fair value to S$0.94; maintain BUY. On the back of lowered earnings risk from the recent positive newsflow on the Gorgon project, we have pegged Ezion＊s TP to a higher 12x recurring FY10 PE (prev 10x), raising it to S$0.94. Maintain BUY.

Ezra Holdings Ltd: Promising Subsea business; maintain BUY

Fresh segment, new opportunities. With upbeat expectations of the new Subsea business division for Ezra Holdings (Ezra), we sought to better understand its potential impact by looking through the lenses of its peers like Acergy [Not Rated] and Subsea 7 [Not Rated]. Current indications point to similar industry-wide difficulties of capex being put off in the short term but these companies have guided for better mid- to longer-term prospects as National Oil Companies and Oil Majors remain concerned on declining supplies. Order books for these companies remain in the billion dollar region although a significant amount would be recognised through 2010. 2009 was largely devoid of contracts but started to trickle back around midyear. Emerging trends of a larger proportion of charter contracts vs. lump sum contracts were also spotted.

Margin expansion for Energy division. We felt that the key message of gradual margin expansion of the Energy Division (currently 13%) to levels closer to its Offshore Division (high thirties) have not been picked up by the investing community. With higher spec-ed assets, we believe Ezra will be able to accord higher valued services, leading to better financial returns. However, we have taken the conservative option of an unhurried gross margin increment for the Energy division to cater for execution risks.

Changes to revenue contributions. We have swapped the MFSVs, liftboats and the Well Intervention vessel into the Energy Division and revisited at our charter rate assumptions. Ezra's new fleet management program for four smallish AHTS vessels will give them additional revenue with no capex costs. These vessels can also be used internally by Ezra (at cost) to make up for any temporary asset scheduling gaps instead of taking on more expensive spot charter vessels. Moreover, its recent equity placement proceeds of ~S$90m will allow it to grow organically or be used to participate in future bond/equity raising exercises by other companies that are unable to pay/refinance its debt.

Maintain BUY. Ezra remains one of our favourites for the sector with its relatively defensive earnings. Coupled with the low base earnings accretion effect from its fledgling Subsea business, valuations will inevitably be driven upwards if executed well. We have tweaked our SOTP to S$1.75 (previous: S$1.46) based on a reasonable 10x FY10F PER (prev: 8x) for its core business and stronger market value of Ezion. Stronger than expected margin expansion and keen execution will give us a reason to re-look estimates and valuation pegs.

Rickmers Maritime: DPU slashed; LTV waiver negotiations continue.

Auditor adds emphasis of matter. Rickmers Maritime (RMT)'s 2Q09 results were in line with expectations, barring a US$7.5m provision (on top of a US$3.5m provision in 4Q08) for impairment on vessel Maersk Djibouti, at risk for redelivery in February 2010. RMT has repaid a total of US$4.2m of loans in 1H09. The auditor issued an emphasis of matter, citing material uncertainty that "may cast doubt on the [trust's] ability to continue as a going concern".

DPU down 72% QoQ. The Board has declared a distribution of 0.6 US cents per unit for the quarter, down 73% YoY and 72% QoQ. This is equivalent to an annualized yield of roughly 6%. The sponsor will defer (but not waive) its right to its share of the distribution of over US$841,374. Including the sponsor's deferral, RMT saves nearly US$7.4m compared to 1Q09 within the trust. This is relatively small, in our opinion, but nonetheless significant: 1) it is highly unproductive to pay out much-needed cash in the face of financial covenant concerns and a large funding gap; 2) more importantly, it serves as an important good-faith gesture to RMT's lenders.

LTV issue unresolved, deposit payment delayed. RMT's attempts to obtain loan-to-value covenant waivers from its lenders, which began in 1Q09, are still ongoing - to our disappointment. The manager could not provide an approximate timeline for the negotiations. LTV covenants affect both existing loans and RMT's ability to drawdown on committed facilities for the three outstanding Hanjin vessels. RMT has started negotiations with banks to refinance a US$130m top-up facility maturing in April 2010. The manager said it is also in negotiations with all stakeholders (including the shipyard; the charterer; and lenders) on the unfunded US$711.6m Maersk vessels due in 2010. Payment of a US$20m deposit on two of the Maersk vessels has been delayed while discussions are ongoing. RMT has also appointed an independent financial advisor and investment bankers.

Price inadequate reflection of risk. No DPU guidance has been given. RMT's lenders may demand loan amortization in exchange for LTV waivers, which would cut into cash available for distribution. An equity issue may also be needed in the next 12 months to part-finance the Maersk vessels. We do not expect a big upward revision in DPU until at least some of these issues are resolved. In our opinion, the current unit price does not adequately reflect the risks associated with investing in RMT. Maintain SELL with S$0.39 fair value.

KS Energy: Drilling and capital equipment business provide support

Results in line with expectations, except distribution business. KS Energy Services Ltd (KS Energy) reported a 35.9% YoY fall in revenue to S$128m and a 39.5% drop in net profit to S$13.7m in 2Q09. Revenue from the drilling services and other business rose 30.6% QoQ partly because two land rigs (Discoverer 2 and 4) commenced operations and the KS Titan-2 delivered its maiden revenue. This accounted for 50% of our fullyear estimate but contributions from the distribution business accounted only about 45% of our estimates with slower demand in the oil and gas industry. Lower steel prices also affected selling prices. The group also reported an additional S$4m insurance claim for KS Titan-1's loss after proceeds of S$9m in 1Q09. 1H09 net profit accounted for 50% of our fullyear estimate.

Warrants issue oversubscribed. The group announced a 1 for 4 warrants issue in June this year which generated S$16.8m cash to increase financial flexibility and support working capital needs. It was 124.36% subscribed, and management is encouraged by the results of the issue. Though the warrants are currently out-of-the-money, they may be exercised six months after issuance, and have one and a half year's expiry.

Updates on KS Endeavour. KS Endeavour, a Super M2 design offshore rig, will be delivered in end 09. This is the only asset on KS Energy's fleet that is not contracted out yet. Charter rates have definitely fallen with the dramatic fall in oil prices, but have stabilized in recent months with oil prices trending up from its low of about US$30 to about US$69 now. When asked about prevailing rates in the market, management gave a range of about US$110,000-US$120,000/day.

Maintain HOLD. As mentioned in our earlier report, KS Energy's fixed charter rates and existing contracts will serve it well during this downturn, but its distribution business may continue to feel the impact of reduced capital expenditure by oil companies. We have revised our revenue assumptions for the distribution business, which is now about 17% lower. We are encouraged to see that recurring profit can be provided by the drilling and capital equipment business but till we see a recovery in the demand of the group's products in the distribution business or the emergence of additional growth drivers, we maintain our HOLD rating and S$1.36 fair value estimate on the stock.

Swiber - Exceeded expectations, but can it be sustained?

2Q09 results ahead of estimates. Adjusting for one-off gain of US$4.5m, Swiber turned in better-than-expected operating profit of US$18m on the back of revenue of US$111m and profit margin of 16%. Another positive was Swiber’s net gearing of 0.75x following the equity fund raising in Jun 09. However, we caution investors on Swiber’s negative FCF and its declining orderbook. We raise our FY09/10 net profit estimates by 37%/32% after adjusting up the net profit margins by 2.9ppt/2.3ppt respectively. Keeping our valuation parameter at 9x on FY10 core EPS, our target price is revised up to S$1.09 (from S$0.85 previously) accordingly. A rerating without sustained order momentum and proven execution track record is difficult. Maintain NEUTRAL.

We are encouraged by operating margin… The 11% YoY decline in 2Q09 revenue to US$110.8m was mainly due to the completion of the projects in Malaysia and execution of fewer projects (4 vs. 6 in 2Q08). Stripping away the non- recurring gain on disposal of assets of US$4.5m, core operating profit of US$17.5m was down 34% QoQ but ahead of our expectations of US$14.0m. After several disappointing quarters, an increase in operating profit margin to 15.8% in 2Q09 is encouraging, though this is some way off pre-credit crisis’ margins of 20%.

.. and enhanced cash position. In Jun 09, Swiber successfully raised net proceeds of US$49.8m which improved net debt to 0.75x as at 30 Jun 09. But investors should take note of the negative free cashflow, Working capital was negative as advanced receivables were worked down while payments were due. As such, Swiber recorded negative FCF for the quarter.

..new order replacement rate is slower than orderbook depletion. While Swiber secured US$93m in 2Q09, its orderbook showed a declining trend, from US$515m in 1Q09 to US$509m in 2Q09. Without a reversal in the shrinking orderbook, revenue growth momentum is unlikely to sustain. Our earnings model shows that FY11 revenue would fall drastically.

..and little is known publicly on the working status of Swiber’s pipelay vessels. Through our discussions with the industry players, we learn that Swiber’s vessels appear to be facing several execution difficulties. We are unable to verify them, as there is limited public information to track the working status of offshore vessels. We hope to seek greater clarity from the management.

Swissco’s 2Q09 recurring net profit in line with expectations

Swissco’s 2Q09 revenue surged 68% y-o-y to S$19.9m, beating our forecast of S$16.4m, due to earlier than expected vessel deliveries. Headline net profit of S$9.4m (+64% y-o-y) included one-off items such as disposal gains of S$4.9m from available-forsale financial assets and PPE, and a forex loss of S$0.4m. Excluding these, Swissco’s 2Q09 recurring net profit would be c. S$5.0m (+27% y-o-y), in line with our projection. Gross margin of 49.5%, while down c. 6ppt y-o-y and q-o-q, is still within historical range of 48-56%. However, operating margin dipped >10ppt on a y-o-y and q-o-q basis mainly due to 1) higher accrual of performance bonus, and 2) a S$1.9m impairment of receivables – we understand this is due to management’s more conservative stance.

Net gearing as of end June 2009 stood at 0.15x vs. 0.23x at end 1Q09 as cash of S$6.5m was raised during the quarter from disposal of PPE and 8m shares in Swiber Holdings. These proceeds as well as secured bank loans are expected to be sufficient to cover the group’s funding requirements for its outstanding capex program.

We are keeping our FY09/10 recurring net profit forecasts and our fair value for Swissco of S$0.84 unchanged. This is based on 7x recurring FY09 PE for its core business, and its 5.3% stake in Swiber, pegged to fair value of S$0.60 per Swiber share. Maintain BUY on Swissco.

SembCorp Marine - Tenders galore will surprise orders on the upside in 2H09

Limelight on Petrobras. We continue to like Sembcorp Marine (SMM) and believe that order momentum in 2H09 may surprise on the upside. While the market seems excited about the plentiful orders from Petrobras, we believe investors have yet to factor in other potential non-Petrobras contracts in the offing. We tweak our earnings model and raise our operating margin assumptions following 2Q09 results. Our new earnings estimates show that, unlike what the Street thinks, FY09 may not be the peak earnings year. We raise our target price to S$3.74 (from S$3.04 previously) as we remove the discount factor in our sum-of-the-parts valuation methodology, given less occurrence of customers defaulting in an improved credit environment. Maintain BUY.

We are equally excited on other non-Petrobras contracts. Petrobras was the focus in SMM’s recent briefing as the management stressed on its multi-prong strategy to undertake Petrobras’ projects. While the market seems excited about the plentiful orders from Petrobras, we opine investors have yet to factor in other potential non-Petrobras contracts in the offing. Our industry checks indicated that SMM is currently bidding for jack-up newbuilds from NOCs such as Saudi Arabia, Vietnam and even China. Other piecemeal contracts include FPSO conversions (potentially in Indonesia and Vietnam) – Refer to Figure 2 on the following page. A recap: strong 2Q09 results. SMM’s 2Q09 revenue rose 8% YoY, 10% QoQ, to S$1.5b, while operating profit was S$167m, an improvement of 50% YoY, 24% QoQ. SMM’s outperformance for the fourth consecutive quarter was due to its strong operating margin of 11.1%, +210bp YoY. We have raised our FY09F-10F operating margins by 20bp.

Slight earnings revision. We push further revenue recognition on PetroRig II and PetroRig III, and cut back earnings from PetroProd’s CJ Jack-up on the back of prudency measures. Our FY09/10 recurring net profits are changed marginally by - 2%/+5% respectively. We think there could be a possible upward revision to consensus’ estimates on the back of stronger margins and more-than-expected orders newsflow. Hence, FY09 may not be the peak earnings year, in our view. Given that the credit markets are improving and the risk of customers’ default is minimised, we remove the discount factor in our sum-of-the-parts valuation methodology.

Cosco - 2Q09 net profit drops 71%

Cosco Corp’s 2Q09 net profit of S$37mn was below our estimate of S$45mn, on lower shiprepair, shipbuilding and shipping earnings. Group sales (shipping and shipyard revenue) declined 31% y-y to S$718mn, against our estimate of S$695mn. Of the S$681.3mn in shipyard revenue, ship-repair accounted for 20%, conversion and offshore for 36% and new-buildings for 44%.

Group 2Q09 EBIT declined 64% y-y to S$79.5mn, against our estimate of S$62.9mn, with EBIT margins contracting by 9.9pts y-y to 11.1%. Included in this was S$25.9mn in reversal in impairment of trade and other receivables and S$8.6mn in exchange gains. This was a quicker-than-expected write-back from S$171mn in provisions made in FY08, mostly in 4Q08. Interest costs increased 637% y-y to S$11.92mn in 2Q09, as group borrowings rose 83% y-y to S$1.2bn.

Management maintained that gross margins for shiprepair remained at 36%, with ship-repair posting estimated gross profits of S$49mn. According to management, newbuildings accounted for 44% of shipyard revenue or S$299.8mn with gross margins of just 1%, giving gross profits of S$3mn. We believe that with persistent and snowballing delivery delays, shipbuilding would have been lossmaking at the EBIT level. Offshore accounted for 16% of revenue, with gross margins of 12% and conversion for 20% of shipyard revenue, with gross margins at 17%, according to management.

Shipping revenue continued to decline sharply, down 45% to S$28.7mn, on collapsing bulk charter rates. Management expects dry bulk shipping to continue to be adversely affected by the weak BDI amidst the global economic downturn.

We remain concerned about continued delays in its shipbuilding delivery schedule. Shipbuilding orderbook YTD stands at US$6.8bn. We maintain REDUCE rating and our price target of S$0.70.

SembCorp Marine - More to come; raising PT to S$3.75

2Q09 earnings came in 15% better than expected on margin expansion: Sembcorp Marine reported a recurring 2Q09 net profit of S$145.2 million (reported earnings of S$138.1 million, up 7.6% y/y), better than our estimate of S$126 million, and up 13.2% y/y. The key reason for the outperformance was the continued expansion of the operating margin to 11.1% in 2Q09 from 8% in 2Q08 driven by operating efficiencies and lower costs. Management also announced a new FPSO conversion contract for S$163 million, taking YTD contracts to S$1.1 billion. As a result we raise FY09E/10E/11E new order contracts by S$800 million/$500 million/$500 million.

Multi-yard strategy in place to take advantage of Petrobras pipeline; are more contracts in the offing? During the analyst briefing, management highlighted the potential use of a multi-yard strategy while undertaking work for Petrobras. Besides its previous and current partners of MacLaren and Maua (with whom SMM could look to undertake new-build and conversion work), management highlighted its intention to consider yard acquisition in Brazil (Upstream had earlier reported a possible greenfield yard being evaluated by SMM). Management highlighted that while rig enquiries are lower, the quality of these enquiries is much higher. Moreover, with the FPSO conversion win and Sea Dragon contract, we could see (a) more production-assetrelated projects, and (b) further transfer of rig work from other yards.

We raise FY09E/10E/11E EPS by 4.7%/7.9%/9.5%, and our SOTPbased Jun-10 PT to S$3.75: We raise our EPS estimates due to (a) higher projected order wins, (b) raising operating margins to 10.5% (from 10.3%), and (c) incorporating recent order wins. We still see upside risks to our FY09/10 estimates on margin enhancement. As a result of our revised assumptions, and rolling forward our timeframe to Jun-10, our SOTP-based PT rises to S$3.75. Current implied O&M P/S stands at 11.9x (versus the historic average of 16-17x). A key risk to our PT is worse-than-expected delays by PBR for orders.

Cosco - Industry continues to remain weak with significant vessel oversupply

Cosco Corp (COS) delivered another weak set of results in 1H09 with revenues down 19% yoy to S$1.43bn, while net income declined 67% yoy to S$70m. 2Q09 net earnings were down 71% yoy to S$37m. Prospects remain poor and risks are high for further vessel order delays and cancellations. Maintain Sell.

COS has in total rescheduled 37 deliveries and cancelled 13 vessels, and we think more may be possible. We previously highlighted that some of the rescheduled vessels may be cancelled and the recent cancellations from COS’s parent clearly demonstrate that. Repair has seen a 40% fall in revenues. COS mentioned that it has not received any direct benefits from the ship building stimulus package.

COS tracks the BDI closely which may in part explain its recent share price strength. Note, Deutsche Bank has a 1,500 and 2,000 average target for the BDI for 2009 and 2010, respectively, versus the current level of about 3,350. We have made the following modifications: (1) rolled over our target PEG from December 2009 to June 2010, (2) lowered our earnings forecasts by between 5% and 7%, and accordingly, (3) raised our target price from S$0.39 to S$0.41.

We base our target price for COS on 0.7x Jun-FY2010E BV and have crosschecked it with the ROE-COE-growth model. Upside risks include higher-thanexpected new order wins, lower-than-expected steel price increases and betterthan- expected project execution (see p. 4 for more details). Maintain Sell.

Yangzijiang Shipbuilding - 2Q09 beats estimates, raising our expectations

2Q09 beat our estimates with net income for 1H09 coming at 56% of our FY09 forecast. 2Q09 net income was up 26% QoQ and 80% YoY with shipbuilding gross margin of over 24%.

Revenue recognition for 1H09 was below our estimates, likely as a result of reschedulings of 18 vessels and a 5% rebate on eight high contracts, but overall YZJ's strategy of defending its order book and margins appears to be working.

Bottom-line was also supported by non-operating income, largely from interest income on cash and short-term investments. YZJ’s total cash and short-term investments totalled Rmb10.3 bn (S$2.1 bn) at 30 June, or S$0.59/share. Total borrowings were Rmb1 bn.

We have pushed out revenue recognition schedule (rescheduling), increased gross margins to approximately 20% (1H09: 22.5%) and raised non-operating income (1H09 was 116% of FY09E), resulting in an 11-24% increase in our 2009-11E earnings (Fig. 2).

Target price is revised to S$1.29 from S$0.6 based on 2010E P/E of 10x (previously 5x). Maintain OUTPERFORM.

Yangzijiang: A strong ship

Consistent earnings delivery albeit tough operating environment. Our conviction in Yangzijiang was raised with its better-than-expected 2Q09 results. The group’s net profit was RMB607m in 2Q09, vs. our expectation of RMB550m.

Improved earnings visibility in 2010. We have previously expected a sharp dip in 2010 earnings in anticipation of high cancellation/rescheduling of order book in 2009. As the jittery is soothed with no cancellation and relatively low deferment to date, we increase our 2010 delivery assumption from 30 to 40 vessels. Gross margin has also been lifted by 2.7ppt to 20% on better operational efficiency. As a result, our FY10 net profit estimate is raised by 50% to RMB1.8bn.

One of the few privileged yards supported by government’s stimulus package. Yangzijiang is one of the three private yards in Jiangsu province that is singled out under the government’s stimulus package. The funding access given to Yangzijiang and its foreign customers reduces ship owners’ default risk and enhances Yangzijiang’s financial capability to pursue M&A opportunities.

The listing of CSIC may provide potential price catalyst to Yangzijiang. China Shipbuilding Industry Co (CSIC), one of the largest shipyards in China, has obtained approval from securities regulatory to list in the A-share market last week. A successful launch of CSIC at good valuation could drive up the values of Chinese shipbuilders, which now trade at an average 16.6x FY10 PE. This could result in a re-rating of Yangzijiang.

Mercator Lines is currently valued at 4.25 times P/E

1Q FY2009 results. Mercator Lines (Singapore) Limited (“Mercator”) reported 1Q FY2009 revenue of US$35.5m (-31% yoy) and net profit of US$10.0m (-54% yoy). Revenue dropped because of the decrease in spot market day rates and the renewal of long term contracts at lower rates. Net profit fell due to lower revenue as well as higher voyage and depreciation expenses. The increase in expenses was the result of the acquisition of three vessels.

Earnings estimates for FY2010F to FY2012F. Due to the downturn in the shipping industry, we expect Mercator to report a much lower profit of US$45.4m in FY2010F. As the global economy is expected to recover in 2010, we anticipate that Mercator will report higher profit of US$48.1m in FY2011F and FY2012F.

Mercator is currently valued at 4.25 times P/E and 0.95 time P/B. Maintain HOLD with fair value raised from S$0.16 to S$0.42. We maintain our hold recommendation as the share price has risen rapidly in the recent rally and upside may be limited. However, we raise the target price of Mercator from S$0.16 to S$0.42, which works out to 1.0 time book value for FY2010F. The change is an increase from our earlier valuation of 0.4 time book value. This is because Mercatoris able to report a profit despite the difficulties faced by shipping companies. In fact, it benefits from having up to 70 percent of its revenue from long term fixed rate contracts of 11 months to five years.

Sembcorp Marine - Strong operating performance

Sembcorp Marine's 1H09 revenues were up 24% yoy to S$2,861m, while net income grew 17.6% to S$258m (about 53% of our full-year estimates). Gross margins were up from 9.9% in 2Q08 to 12.9% in 2Q09; on a half-yearly basis; they rose from 10.2% in 1H08 to 11.8% in 1H09. Operating profits surged 58% yoy to S$301m in 1H09 (up 50% yoy to S$167m in 2Q09). As valuations remain attractive, we maintain Buy.

As we have highlighted before, two key conditions are required for a sustained recovery of the sector: (1) improvement/stability in oil prices, and (2) easing of credit. At current oil prices, investments previously put on hold are now beginning to return. We also see incremental signs/examples that suggest substantial easing of credit in the O&M sector.

The alarming rate of decline of global oil reserves, as highlighted by the IEA, is prompting countries such as Mexico to aggressively step up spending within the industry to halt this decline. We expect more countries to follow suit in the long term. We believe SMM is well positioned to benefit from this trend, having built up its branding and execution track record over the years. SMM has announced a new S$160m FPSO conversion contract, bringing YTD new orders to S$1.12bn.

SMM has a strong net cash position of S$1.84bn (S$1.18bn in progress payments), which places it well for potential M&A activities. Our SOTP-based target price is S$3.80 (target multiple of 15x FY09E earnings for O&M business; market/implied values for Cosco). Risks: unexpected cost escalation, execution risks, foreign currency volatility, and a sustained plunge in oil prices.

SembCorp Marine - Above expectations: Strong margins, but order backlog falls further

Annualized 1H2009 earnings of S$258mn was 5% ahead of our expectation. The difference was largely due to the better-than-expected operating margin, which came in at 10.5% in 1H, vs. GS full-year forecast of 8.8%, reflecting strong operating efficiencies, especially with repeat rig orders. There were two negatives, though: 1) associate earnings were weaker, mainly due to Cosco Shipyard Group, and 2) there was a S$8m write-off on its small Petroprod investment, which recently went into liquidation. Separately, Sembcorp Marine won a S$160mn FPSO conversion contract on August 3, including previous wins; ytd new orders are now at S$1.1bn. This is helping to replenish order backlog, which has now fallen to S$7.9bn, vs. the previous quarter’s S$8.4bn. Sembcorp Marine remains positive on demand long term, though near-term conditions could be challenging. A S$0.05 interim dividend was announced.

We are raising our 2009E-2011E EPS by 4%, 3% and 6%, respectively, mainly due to stronger operating margins, and higher-than-expected new orders; we previously forecast US$500mn. We are rolling over our 12-m P/B-based price target to 2010, increasing our price target to S$1.15 (vs. previous S$1). We remain cautious on the medium-term outlook for offshore and marine prospects, especially considering the sluggish E&P spending globally and significant rig supply oncoming. Retain Sell. Key risk: Higher-than-expected oil prices, stronger new order momentum.

COSCO - Expecting lower 2Q09 shipyard margin

We are expecting a 20% qoq increase in shipyard turnover to S$792m in 2Q09 due to higher contribution from offshore and marine newbuild contracts. However, gross profit growth is expected to be eroded by high operating costs.

We forecast 2Q09 gross margin at 14% (1Q09: 15%) for the shipyard segment. This is lower than the 20-30% seen in 2007-08. This is mainly due to higher operating costs as the Group procured 400,000 tonnes of steel at Rmb6,000/tonne in 2008 compared with an average Rmb4364/tonne in 2007. This amount of steel can build up to 40 dry bulk vessels and the price has fallen by 33% to an average of Rmb4,000/tonne.

We estimate 2Q09 dry bulk shipping revenue to fall 33% qoq to S$28.6m (1Q09: S$42.9m) in view of a weaker dry bulk shipping market.

In 2Q09, COSCO (S) secured a US$80m FPSO conversion contract awarded by MODEC in May 09 and some shiprepair works. Ytd contract wins amount to US$80m (2008: US$1.1b). In 2Q09, 13 dry bulk carrier orders were postponed and eight were cancelled.

Currently, about 31 dry bulk vessels are under construction. COSCO (S) is targeting to deliver 15 vessels in 2009, one of which was delivered in 1Q09, but none was completed in 2Q09.

To date, 40-50% of COSCO (S)’s dry bulk orderbook has been cancelled or delayed. The Group’s current gross orderbook stands at US$6.7b (we estimate net orderbook at US$4.5b).

We believe COSCO (S)’s share price will continue to underperform in view of: a) poor shipbuilding execution at its shipyards, b) current low level of contract wins, c) potentially more order cancellations and delays and d) an uncertain dry bulk shipping outlook.

COSCO (S) trades at PEs of 22x for 2009 and 25x 2010. In view of its poor prospects, we maintain our SELL call on the stock with a fair price of S$0.95 based on sum-of-the-parts (SOTP) valuation.

Keppel - Robust 2Q09, higher interim dividends

Keppel’s 2Q09 net profit, including exceptional items, rose 147% y-y to S$739.5mn, and was up 6% y-y to S$317mn (excluding EI). Group EBIT grew 36.6% y-y to S$357mn, with O&M accounting for 75% of EBIT, property for 21% and infrastructure for 6.7%. 2Q09 group EBIT margins improved to 11.1%, mainly reflecting higher O&M margins. The group associate earnings declined 43% y-y to S$98mn, reflecting the earnings decline of recently divested Singapore Petroleum Company (SPC) (previously 45.5%-owned). SPC has since ceased to be an associate, after the stake was sold to PetroChina at S$6.25 per share or S$1.47bn in June 2009.

The group booked exceptional gains of S$621mn from the SPC divestment but this was offset by total impairment charges of S$189mn in the quarter, mostly reflecting asset write-downs at its infrastructure (S$113.8mn write-down) and goodwill write-offs (S$15.5mn) at its offshore & marine divisions. In 2Q09, the group’s property division EBIT gained 3.3% y-y to S$76.5mn while infrastructure EBIT rose to S$23.8mn from S$1.4mn previously.

Offshore & Marine 2Q09 EBIT rose 45.2% to S$267mn, with EBIT margins improving to 11.8% from 10.1% in 2Q08, and was also higher than the 10.4% achieved in 1Q09. While the group did not win any new O&M orders in 2Q09, management expects the group’s S$7.7bn orderbook to keep its yards busy, with deliveries into 2012. The group secured new orders totalling S$5.2bn in 2008.

We maintain BUY with a PT of S$8.57, which is pegged at a 5% discount to our SOTP value of S$9.03. We value the O&M division using DCF over a 20-year period, incorporating a cyclical downturn in earnings from FY10F, and a WACC of 7.5%. The group’s other businesses are valued at the current market prices.

Sembcorp Marine: Steady performance

Better than expected 2Q09 results. Sembcorp Marine’s (SMM) revenue in 2Q09 was S$1.5b, in line with our expectation for order book drawdown. SMM’s strong S$145m recurring net profit in 2Q09, vs. our expectation of S$122m, was due to higher EBIT margin of 11.1% (vs. our estimate of 9.8%). This was due to better-than-expected operational efficiency and relatively subdued margin pressure on variation orders.

Raising profit estimates. We have raised our recurring net profit forecasts to S$516m (+6%) in FY09 and S$553m (+5%) in FY10. These are due to the lower order cancellation assumption of 6% (-6ppt), and the higher EBIT margin estimate of 10.6-10.8% (+0.8ppt).

S$1.1b y-t-d order wins. SMM’s S$1.1b y-t-d order win has outpaced its peers, and is on target to reach our S$3b assumption. This includes SMM’s latest S$160m FPSO contract win from MODEC. Coupled with more spaced out order book drawdown, SMM’s order book of S$7.9b is now bigger than Keppel Corp’s S$7.7b.

Better quality of project enquiries. SMM guides that the quality of enquiries for rigbuilding/offshore jobs has improved. We expect the increasing seriousness of the bids as incentives for equipment suppliers to potentially moderate their prices lower to move sales.

Raising target price. Our target price for SMM is raised to S$3.70, as we roll forward SOTP valuation metrics to FY10 EPS on better margin visibility. Maintain BUY.

Cosco - 2Q09 earnings dragged by weaker gross margins

2Q09 results below expectations. While Cosco Corp reported 2Q09 revenue of S$719m that was in-line with our forecasts, core operating profit (excluding reversal of impairment of trade receivables) of S$34m was below our estimates. This was due to a decline in gross profit margin from newbuilding as well as lower revenue contribution from the sale of scrap materials. Net profit was affected by higher interest payments. Underlying FCF remained negative. No interim dividend was declared. We cut our earnings estimates as we take into account lower gross profit margins for FY09 and FY10. Hence, our target price is reduced to S$0.95 (from S$1.14 previously). Downgrade to SELL from NEUTRAL.

Positive highlights: 1. Reversal of impairment of trade receivables of S$26m, thus removing overhang on weak customer credit quality and customer nonpayments. 2. Management disclosed that they are currently in talks with three clients on offshore contracts which may translate to new order flow.

Negative spots: 1. Gross profit margin for newbuilding declined drastically from ~5% to ~1%, despite partial steel inventory write-down of S$89m in 4Q08 which would have possibly eased off some cost pressure. Nevertheless, this also reflected poor yard execution. 2. Cosco gained S$16.4m (-57% YoY) from the sale of scrap metals in 2Q09. Management noted that approximately 50 ships were repaired during the quarter (vs. an average of 106 ships per quarter in FY08). 3. Higher interest expense of S$12m (+637% YoY) on increased borrowings to fund yard expansion. 4. Free cash flow remained negative as revenue recognition was pushed back and capex had not scaled down. 5. Since Dec 08, 37 bulk carriers have been deferred while 13 others cancelled to-date, affecting 50% of the total order book.

Cosco is currently trading at 19.6x FY09 P/E and 2.5x FY09 P/B which looks expensive to us, especially when Cosco’s results once again suggested poor yard execution and deliverables. In the near term, the lack of new order flow, further potential order cancellations and more delays in ship deliveries could weigh down on this stock.

Sembcorp Marine - Waiting for Petrobras

Sembcorp Marine posted results that were slightly ahead of expectations, due to better strength in margins from improved execution. Net profit rose 7.6% YoY to S$138.0m on the back of an 8% pickup in turnover to S$1.5bn. Gross margins improved to 12.9% versus 10.7% in 1Q09. We expect this improved margin to be sustainable. SMM also declared an interim dividend of 5 cts per share (payable 1st Sept), equal to 1H08.

Rig-building continued to be the main driver of earnings, accounting for 69% of revenue, and was up 19.6% YoY to S$1.0bn. Ship repair typically showed softness in the current economic climate, with revenue down 11% to S$173m, where shipowners typically reduce its scope of work, resulting in lower average revenue per vessel.

Margin improvement resulted in a YoY 40% improvement in gross profit to S$193m. However, there was a 69% decline in associate earnings to S$12.0m, due to the woes of Cosco Shipyard Group (CSG). There was also a net loss of about S$6m on foreign exchange losses which were partially offset by hedges.

SMM’s orderbook stands at S$7.9bn, with additions of S$1.1bn this year, including a S$160m FPSO conversion for MODEC announced yesterday. At the current run-rate, most of this will be converted over the next 5 quarters. As for new rig orders, SMM says that it is still in negotiations with several parties. Notably, SMM is gearing itself up to bid for jobs from Petrobras, which is slated to spend over US$100bn for upstream projects. However, so is everyone else – the resulting competition is likely to put pressure on margins on contracts from Petrobras.

We are tweaking our FY09 earnings forecast up by 2.3% to S$508.5m to factor in improved margins. We also raise SMM’s price target to $2.91 from $2.73 previously, on the higher forecast and market value of Cosco shares in our sum-of-the-parts valuation. While 2-yr earnings CAGR is still 11.3% p.a., we expect turnover to taper off from 2011 onwards. While we do expect the rig market to pick up, we are unlikely to see the same strength as the last boom cycle between 2005 and 2008. Maintain Hold.

Cosco Corporation: Not out of the woods yet

Cosco Shipyard Group disappointed again. Group sales dropped 31% yoy to RMB 719m due largely to 40%-50% yoy dip in offshore, ship-repair and conversion revenue. Coupled with lower margins across shipping and shipyard operations, net profit plunged 71% yoy to S$37m. Stripping out the write back of receivables amounting to S$13m (after MI), bottomline would have been even lower at S$24m (-81% yoy). While offshore, ship-repair and conversion business maintained its gross margins, newbuild operations remained in the red. The only saving grace was the better-than-expected shipping earnings on stronger charter rates in 1H09.

No sign of recovery in 2H09. We have previously expected Cosco¨s newbuild segment to turn profitable in 2H09. However, we now believe it would remain in the red due to: (i) delivery on its lower-priced contracts for parent company; and (ii) weak margins for current projects on poor execution. Gross margins of 1% is unlikely to improve and shipbuilding will continue to incur losses in 2H09. Outlook for shipping, shiprepair and conversion remain weak.

Cut 2009/2010 earnings by 25%. We cut our 2009 earnings by 25% to adjust for higher shipping day rates (up from US$18k per day to US$20k), but offset by lower contributions and margins from shipbuilding and shiprepair. We have also rolled over our valuation to FY10F, our target price raised to 96cts, based on 13x its shiprepair/conversions profits, 9x its shipbuilding/offshore profits. However, stock remains expensive, at 17.3x FY10F, its PE is the highest in the sector for a company suffering from order book vulnerability and execution problems at its yard.

Ezra - The subsea rises

Ezra's recent new growth strategy announcement on the subsea market marks a strategic and transformational move to focus on one of the fastest growing segments of the O&M sector, and we expect earnings to benefit. At 7.1x FY2010E PER, with an EPS CAGR of 41%, and trading towards the lower end of its historical range, we believe valuations are attractive. Initiate with a Buy.

Our FY2011E earnings estimates are around 50% above the market’s and we expect Street forecasts to rise over the coming year as Ezra’s plans begin to materialize. The group has a good execution track record over the years and we believe there is plenty of room for a positive re-rating as their earnings accelerate, moving them up towards the O&M mainstream names.

Global subsea spending in the next five years should rise >70% over the previous five years. Subsea spending should total about US$160bn from 2009 to 2013, and 3,222 subsea trees are due to be installed during this period. With its upcoming high specification vessels, enhanced know-how and expertise, and good execution track record, Ezra should be in a strong position to benefit.

We have set Ezra’s target price at S$2.50, which is derived by averaging the estimated values of the PEG and Gordon Growth model methods. Risks include vessel delivery delays, execution, any unexpected offshore mishaps, a sustained plunge in oil prices, and any unexpected departures of key executives.

Cosco - Still in the doldrums

COSCO Corp (S) (COSCO (S)) reported 2Q09 net profit of S$37.0m (- 71.2% yoy; +11.7% qoq) due to lower shipyard revenue, weaker charterhire rates and higher operational costs.

Shipbuilding revenue rose 22.6% yoy to S$299.8m (+55.6% qoq) while revenue for the ship repair, conversion and offshore segments fell 39.4%, 52.0% and 30.4% respectively. According to management, dry bulk shipping earnings totalled about US$20m for 1H09 (1H08: US$55m). This translates into a net margin of 38% (1Q09: 40%).

Management guided that 2Q09’s shipbuilding gross margin was only 1%. This was mainly due to higher operating costs as COSCO (S) procured 400,000 tonnes of steel at Rmb6,000/tonne in 2008 compared with an average of Rmb4,364/tonne in 2007. This amount of steel can build up to 40 dry bulk vessels. Steel price has since fallen 33% to an average of Rmb4,000/tonne.

Total borrowings rose from S$656.6m in 1Q09 to S$1.2b in 2Q09 to fundshipyard expansion. COSCO (S) had net cash of S$672.2m as of end- 2Q09.

Gross orderbook stands at US$6.8b (we estimate net orderbook at US$4.5b). Of the 100 dry bulk carriers in its orderbook, 39 are under construction. The Group is targetting to deliver 12 vessels in 2009, one of which was delivered in 1Q09. Twenty-nine vessels are scheduled for delivery in 2010 and 48 in 2011. Eleven dry bulk vessels will be on sea trial from now to end-09. To date, there have been 37 delivery delays and 13 order cancellations.

The contract for Sevan Driller 2 is still pending finalisation although Sevan Marine has announced it has secured equity funding for the drilling unit. If this contract materialises, it will be COSCO (S)’s first contract clinched in 2009.

We estimate COSCO (S)’s shipyard turnover to fall 5% yoy to S$3.0b in 2009 (2008: S$3.2b) due to lower ship repair and conversion revenue. Shipping turnover is forecast to halve to S$128.7m in view of a weaker dry bulk shipping market.

We believe COSCO (S)’s share price will remain in the doldrums in view of the following: a) poor shipbuilding execution at its shipyards, b) current low level of contract wins, c) potentially more order cancellations and delays, and d) an uncertain dry bulk shipping outlook. That said, should the Sevan Driller 2 contract materialise, share price could see some short-term strength.

COSCO (S) trades at PEs of 22x 2009 and 25x 2010 earnings. In view of its poor prospects, we reiterate our SELL call with a fair price of S$0.95 based on sum-of-the-parts valuation.

Yangzijiang Shipbuilding - summary and update

YZJ reported 80% yoy increase in 2Q09 PATMI of Rmb607.4m (+26% qoq; 1Q09: Rmb483.3m).

This is mainly due to an improvement in productivity from the new yard and higher profit recognition from three high margin vessels delivered in 2Q09.

Eleven vessels were delivered in the quarter as compared to six in 2Q08.

Orderbook stands US$6.1b comprising of 139 vessels or 2.54m CGT (66 containerships, 73 dry bulk carriers)

Excluding restricted cash of Rmb3.2b, YZJ has a net cash of Rmb4.8b.

Till date, YZJ has not received any order cancellation of vessels.

Eighteen vessels will be rescheduled by five to 24 months after the Group has received 40% prepayment in cash.

A total rebate of US$38m was provided for eight high margin vessels (GP margin >30%) in which the amount accounts for 5% of vessel costs.

Out of the eight high margin vessels, three have been delivered in 2Q09. The rest will be delivered by 2010.

In view of the numerous enquiries on multi-purpose cargo vessels from customers, YZJ has begun construction on two 92,500 dwt vessels.

The new shipyard is currently operating at 50% capacity utilization rate while the old yard is at full capacity.

YZJ plans to deliver 40 vessels in 2009, 45 in 2010 and 45 in 2011.

Based on consensus forecasts, YZJ is trading at 10.2x 2010 PE (9.5x 2009 PE) and 2.3x 2010 PB (2.8x 2009 PB).

SembCorp Marine - Much hope is pinned on Petrobras’ capex

Sliding orderbook, but SMM has fared better than Keppel Corp. SembCorp Marine’s (SMM) orderbook (excluding shiprepairs) was S$7.9b as of 4 Aug 09 compared with S$8.4b a quarter ago. SMM has secured S$1.1b worth of new contracts ytd, which is on track to meet our S$2b estimate for 2009.

Much hope is pinned on Petrobras’ capex, as enquiries from other customers remain low. Petrobras will need 28 more drilling rigs (semis and drillships) over the next five years (5-6 p.a.) as part of its expansion. Competition will be intense. Of the 12 rig contracts awarded by Petrobras in 2008, only one was secured by Singapore. South Korean shipyards benefitted the most as most of the contracts were for drillship newbuilds. Lower margins. Petrobras is now preparing to issue tenders in 3Q09 requesting the provision of as many as 7-8 newbuild floaters for contract start-up from 2013, according to ODS-Petrodata. We estimate shipyard contracts could total US$5b-6b (S$7b-9b). However, history has shown that for shipyards, Petrobras projects typically have lower margins than projects for other customers.

No change in target price and earnings forecasts. Our fair price of S$2.60 is pegged to our sum-of-the-parts (SOTP) valuation of S$2.56/share. Our SOTP valuation is premised on the following: a) SMM’s sustainable contract wins level of S$3b p.a. in the longer term, translating into an annual net profit base of S$235m, b) SMM’s own shipyard is valued at a PE of 15.0x (i.e. preoffshore oil & gas boom valuation for large shipyards), and c) SMM’s 30% stake in CSG is valued at a PE of 8.0x (i.e. pre-offshore oil & gas boom valuation for large shipyards) of its earnings based on long-term sustainable contract wins of S$2.0b p.a.

Keepl - await the Petrobras 'order-train'

Upgrade Keppel Corp to OW: We upgrade Keppel Corp from Neutral to Overweight and raise our PT to S$9.50, representing 21% upside from the current share price. Three key reasons for our upgrade are: (a) better than-expected 2Q09 earnings driven by O&M segment’s margin expansion (11.8% for 2Q09 versus 10.1% for 2Q08); (b) recent steps taken by management to streamline its business (SPC sale, KPLD rights issue) resulting in ‘clean net cash' position of S$200 million (from ‘clean net debt’ of S$835 million); and, most importantly, (c) potential new orders from Petrobras with near-term focus on (i) eight FPSOs hulls bid out by Aug'09, and (ii) next round of 7-11 deepwater rigs.

O&M segment surprises on margins; we raise FY09E/10E/11E EPS by 12%/14%/17%: Keppel reported a 2Q09 recurring net income of S$317 million versus J.P. Morgan’s estimate of S$270 million, 17.4% better than expected. The key reason for the variance was the stronger than-expected performance by the O&M segment due to steep expansion in the EBIT margin from 10% in 1H08 to 11.1% in 1H09.

Petrobras orders remain the big driver for offshore sector; three ‘potential’ near-term opportunities for Keppel: While the upcoming round of 7-11 rigs (7 PBR-owned and the rest being chartered out) remains the key opportunity for Singaporean/Korean yards, in the near term we see additional potential catalysts for Keppel, namely (a) potential US$4 billion order for the eight FPSO hulls (the entire set of eight hulls is likely to go to a single winner), alongside (b) news flow of Technip being a leading candidate for P-58 and P-60. Given Technip and Keppel’s close working relationship for P-51, P-52, and P-56, Keppel may benefit if these two assets are eventually awarded to Technip.

Price target, valuation, key risks: As a result of our raised estimates and new timeframe of Jun-10, our PT increases to S$9.50. This implies 14x 2009E earnings and a 3.7% dividend yield. We believe the key risk to our PT is a continued global slowdown leading to worse-thanexpected new orders.

Ezra - Sub sea journey

By adding new specialized equipment and functions to assets it already has under construction, Ezra is increasing their market value. These assets will be destined to support deepwater sub sea services (the company’s new area of growth) instead of exploration services. Our FY11 EPS estimate rose by 11% after taking conservative estimates on the new assets, but could rise by another 20% in a blue-sky scenario. At 7.7x FY10 PE the stock is cheap. Maintain BUY. New TP holds 54% upside.

Ezra’s new growth strategy is focused on the drilling market (support of oil production activity) instead of the exploration market. This is the market where oil majors are spending their additional capex dollar. Ezra plans to grow through the addition of highly specialized vessels that perform installation and maintenance work for drilling projects in the deepwater sub sea segment. While the long term chartering of its current fleet of 25 AHTS vessels, which support exploration rigs, will provide a stable earnings source.

By adding new specialized equipment such as drilling towers, ROVs and moon pools to assets that it already has under construction and by providing a highly qualified team of engineers, Ezra is able to bid for contracts in the deepwater sub sea segment that could obtain significantly higher charter rates than if the assets were to be used to in the exploration segment. For example, after converting a pipe-laying barge into a DP3 sub sea construction vessel, Ezra could potentially obtain charter rates of US$250-300,000/day instead of the US$130,000 we had factored in.

After taking conservative estimates on the DP3 and 2 MFSV assets that Ezra will use for the sub sea segment, our FY11 earnings estimate rose by 11%. In a blue-sky scenario, our FY11 EPS estimate could be another 20% higher than our new estimate. Besides this the company has signed an agreement with a third party to market and operate their support vessels in return for a share in their profits. This could add another US$8-10m in earnings annually.

Based on our new earnings estimates, Ezra is trading at 7.7x FY10, more than one standard deviation below its long term average. We value the stock at S$2.10/share, based on our DCF-derived target price, 11% above our previous target. Risks remain on the FPSO for which Ezra has yet to be paid.

MARCO POLO Marine - Ship Repair Expansion To Offset Shipbuilding Downturn

Marco Polo Marine Ltd (MP) is an integrated shipping group principally engaged in: a) ship chartering, which includes the provision of chartering, re-chartering and transhipment services of tugboats and barges and b) shipyard operations, which include the provision of building, repair and broking services of tugboats and barges. As of end-1HFY09, the Group had a shipbuilding orderbook of S$51.9m, excluding S$29.8m shipbuilding projects meant for its own ship chartering business. MP currently operates a fleet of 55 vessels.

Stable and constant ship chartering revenue. The ship chartering rates for most offshore support vessels (OSV) have fallen by 20-40% from their peaks but the rates for tugboats and barges have remained stable, according to MP’s management. MP is also the exclusive supplier of chartering services of tugboats and barges to BRJ, a major customer controlled by the Lee family. The products transported for BRJ and other Indonesian customers are mainly mining products such as granite and aggregates mined in Indonesia, mainly for the construction, infrastructure, property development and land reclamation industries in Singapore and, to a lesser extent, Indonesia.

Recurring earnings through JV with Glencore International AG, one of the world’s largest suppliers of a wide range of commodities and raw materials to industrial consumers. The 50:50 JV (MPST Marine Pte Ltd (MPST)) is to jointly own and operate a fleet of tugboats and barges for the provision of transhipment services of cargoes for Glencore and/or its related corporations and affiliates. MP will procure shipbuilding and supply of an initial fleet of 24 vessels, out of which 10 were delivered and 14 are scheduled for delivery by end-09. MP expects recurring contributions to its earnings through the share of profits in the jointly controlled MPST.

Ship repair expansion to offset shipbuilding downturn. The management expects its ship repair business to contribute significantly to its shipyard operations once the second dry dock (currently under construction) becomes operational. Ship repair business tends to generate higher gross profit margin of 35-50% than shipbuilding (15-18%) and it is less cyclical given the recurring need for maintenance and repair of vessels. Management guided that each of the two dry docks has the capacity to repair six to eight vessels per month at a cost of S$150,000-S$300,000 per repair work. MP is currently trading at 1.9x P/B and 8.9x PE. The hybrid OSV sector that MP falls under is trading at 1.3x P/B and 6.3x PE.

Keppel - O&M core operations remain strong

Core above expectations. 2Q09 core net profit of S$318m (+6% yoy) was 27% above our estimate but in line with consensus, thanks to stronger-than-expected earnings from Offshore & Marine (O&M) and Property. 1H09 core profit of S$603m (+8% yoy) forms 58% of our FY09 forecast. 1H09 reported profit of S$1.02bn (+83% yoy) was below our estimate and consensus, due to a S$189m asset impairment charge for Infrastructure and O&M that offset its SPC divestment gain.

Strong O&M margins. 2Q09 operating margins of 11.8% were above guidance of 8-10%, thanks to better cost control from the execution of repeat rig orders. We believe the margin strength can be sustained into 2H09 and expect stronger revenue with 38 scheduled deliveries (1H09: 15 deliveries).

Order-cancellation risks reduced; hopeful on Brazilian order wins. O&M order book was S$7.7bn with S$330m of order wins to date. Management does not foresee more order cancellations and is cautiously confident of capturing some orders by end-2009. With its yard facilities in Brazil and track record with Petrobras semi-sub orders (P52, P51 and P56), Keppel is in a good position to capture Brazilian wins. We leave our order-win assumption of S$1.5bn for 2009 intact.

Conserving cash for growth. An almost unchanged interim dividend of 15 Scts (1H08:14 Scts) was declared, despite stronger earnings and cash of S$3.3bn (1H08: S$1.6bn). The excess cash could be used to fund expansion in Infrastructure or Property. However, we believe some special dividend could be announced in FY09. About S$2bn of the cash comprises deposits collected from O&M.

Earnings estimates raised by 6-9% for FY09-11, to incorporate: 1) higher sales and margin assumptions for O&M; and 2) our earnings upgrade for Keppel Land.

Maintain Outperform with higher target price of S$9.00 (from S$8.50), still based on sum-of-the-parts valuation. Our target price rises as a result of higher earnings assumptions for O&M and an increased target price for Keppel Land.

Pacific Shipping Trust - 2Q09: Retaining cash for acquisitions

PST is distributing 2Q09 DPU of 0.99 US cents, implying a yield of 16% p.a., but is reducing its 3Q09 distribution policy from 90% to 70% to fund future vessel acquisitions.

Pacific Shipping Trust (PST) reported 2Q09 net profit of US$6.7m (+0.8% qoq, -20.2% yoy). Excluding losses from interest rate swaps, earnings would have been US$8.7m (+0.5% qoq; +79.6% yoy). PST declared a 2Q09 DPU of 0.99 US cents, similar to 1Q09 DPU of 0.98 US cents, but lower than 2Q08’s 1.09 US cents.

We estimate 2009 and 2010 dividend yield of 12.7% and 10.0% respectively after adjusting for a change in distribution payout policy from 90% to 70%. Maintain BUY with target price of US$0.37.

The trust is reducing payout ratio from 90% of distributable cash flow to not less than 70% for 3Q09. The cash retained will be applied towards funding of acquisition of one or two mid-sized chemical tankers and/or offshore support vessels at US$20m-30m each in the next six to 18 months. While no guidance is given on whether the distribution policy will be maintained at 70% going forward, we do not rule out the possibility that the trust may further reduce payout ratio should the need arise to fund acquisitions. That said, we view this positively as ship prices have fallen sharply from their peaks in 2008. Accretive acquisitions may drive a re-rating of the stock.

In view of the change in distribution policy from 90% to 70%, we reduce our DPU forecasts for 2009-11 by 5-22%. PST has no loan-to-value covenants in its loan documents. All loans are amortised. Its current net gearing stands at 89%, the lowest among the shipping trusts. We forecast 2009 and 2010 dividend yield of 12.7% and 10.0% respectively after adjusting for the reduced distribution payout ratio. Maintain BUY with target price of US$0.37 based on 2010 P/B of 0.9x, higher than the P/B ascribed to the other two shipping trusts given PST’s stronger financial position.

Ezra 10 year growth plan

Ezra holdings shared their 10 year growth plan. The key thrust for the Ezra group from 2010 onwards would be to address the sub-sea industry. Independent industry research by Douglas-Westwood values this sub-sea market at US$162b (2009-2013).

This will be the key target market with their new Multi Functional Support Vessels (MFSVs) to be delivered in Jun 2010 and Sep 2010.

Our take:

1) No additional earnings impact. We are not accreting any new impact as we've already catered for the MSFVs' contributions. Unless contract wins announced in Jun 2010 onwards exceeds our earnings expectations, we will be retaining our current forecasts.

2) No new capex required. The Ezra group will not need any new capex for this penetration into the sub-sea market.

3) More clarity on new business direction. With the uncertainty in the AHTS market rates, we are comforted that the group has a clear roadmap to acquire new businesses. Ezra aims to have an equal split (1/3-1/3-1/3) in its revenue from offshore (mainly AHTS charters), sub-sea work and Marine construction work (mainly Vietnam yard) in 5-7 years time.

We are retaining our BUY rating and fair value of S$1.46.

ASL Marine: Character to tide through tough times

New loans growth still weak. From our discussions with several industry players in the offshore and marine industry, the ease of obtaining loans from banks is still nowhere close to pre-crisis levels. Indeed, obtaining bank financing is still a difficulty, especially for relatively smaller firms. On a broader point of view, latest monetary statistics show that businesses have bore the brunt of the credit crunch, as loans growth to firms in Singapore decelerated rapidly to only 3.7% YoY in May compared to 37.2% growth in September last year (Exhibit 1). On top of weak demand, unavailability of credit facilities will continue to suppress new shipbuilding orders.

Less costly assets, less impact. Activity will be greatly affected in a downturn when the cost or working capital needed is high. Oil companies have doused their enthusiasm about going into deepwater drilling due to the significant funds and costs involved. Tugs and barges are relatively less costly than most other offshore support vessels, and being a specialist in this area may serve ASL Marine well in this downturn.

Ship repair activities holding up. We were updated by management that ship repair activities are still holding up for now, though we note that ship owners may attempt to defer maintenance works that are not mandatory. As mentioned in our earlier report, this business segment is likely to be affected during this downturn and experience pricing pressures. However, the medium to long-term prospects of this business is bright considering the significant increase in the global fleet in the past few years.

Maintain BUY. The current economic downturn and the uncertainty in oil prices make it hard for companies to negotiate for new contracts unless they have deep pockets backed by earnings visibility. ASL's relatively low gearing (net debt-to-equity: 0.17x), strong order book (S$582m extends to FY11) and diversified income streams will aid it to emerge as a stronger player in the longer haul. The stock is currently trading around 3.5x FY09F PER, lower than the average 9x of its comparable peers. We maintain fair value estimate of S$1.03 for ASL Marine and our BUY rating remains.

Rickmers Maritime: Between a rock and a hard place

Between a rock and a hard place. We have a NEUTRAL rating on the shipping trust sector, which faces falling asset values and counterparty concerns driven by a weak shipping market. These broader issues are compounded for Rickmers Maritime (RMT) because of its high leverage (2.2x debt-to-equity as of 31-March) and sizeable contracted acquisitions that were committed to during the better days. To recap, our concerns include: 1) loan-to-value covenants on existing loans; 2) loan-to-value requirements that affect RMT's ability to draw down committed loan facilities for the US$207m Hanjin acquisitions due in 2H09; 3) a need to repay up to US$154m in loans next year (our estimate); 4) no arranged financing for the US$711.6m in contracted acquisitions due next year; and 5) the likely redelivery of a vessel in February 2010 that could impact cash flows.

2Q DPU and its implications. At 2Q results, our focus will be on a possible update on ongoing negotiations for waivers on loan-to-value covenants; aswell as the distribution amount declared for the quarter. RMT, which does not provide distribution guidance, paid out 2.14 US cents per unit in 1Q09. Coincidentally, this was the floor amount mandated under a subordination structure that expired 01 Apr. We think the 2Q DPU decision may be driven by conflicting forces: it may make sense to cut or freeze distributions entirely to save cash to fund obligations and to appease lenders. But the cash saved is small relative to what is needed. Cutting distributions could also hurt any potential equity-raising efforts, rather than help.

Don't expect quick resolutions. Aside from the two aforementioned data points, we would be genuinely (positively) surprised if RMT is able to provide clarity on the larger issues. Our concern is that RMT is already unsustainably geared as it is; and the committed acquisitions leverage up the risk. Additionally, there is no clear roadmap of what the best solution is in this case: ideally the 2010 Maersk vessels worth US$711.6m would just "disappear" - but that may not be possible. And if an equity issue is required, unitholders will have to ask themselves if they want to fund purchases fixed at boom-time prices. With the high level of risk and no clear path out of the woods, we think it is prudent to maintain our SELL call. The recent price increase impacts the equity issue assumptions underlying our valuation. Our fair value estimate consequently increases to S$0.39 from S$0.29 previously.

Singapore Petroleum Company: 2Q09 results in-line with expectations

2Q09 results in-line with our expectations, though negative surprise from impairment provision. Singapore Petroleum Company (SPC) reported revenue of S$1.7b (-48% YoY, 18% QoQ) and core operating profit of S$99m (-58% YoY, -1% QoQ) for 2Q09. Earnings contributions from both downstream and E&P divisions were in-line with our estimates but exceeded that of the Street’s. SPC’s downstream contributed operating profit of S$86m as refining margins averaged US$3.00/bbl, (vs. our forecast of US$3.10/bbl), while SPC’s E&P turned in operating profit of S$13m on the back of an average realisation price of US$62.61/bbl. The negative surprise, in our view, was another quarter of non-cash impairment provision of S$34.9m made in relation to Sampang development. No interim dividend was proposed, despite SPC’s positive cashflow from operations, strong balance sheet and low gearing of 0.2x. Given that the implied value from PetroChina’s bid for SPC’s assets is still a premium to SPC’s intrinsic value in our view, we urge investors to accept the offer.

Another quarter of non-cash impairment provision. SPC made a non-cash impairment provision of S$34.9m in relation to the Sampang development as it assessed that its asset carrying value exceeded the estimated recoverable amounts under the current price environment.This is the second consecutive quarter in which SPC wrote down one of its core E&P assets, following the first non-cash impairment provision amounting to S$43.3m made in 1Q09 for drilling SPC’s refining outlook likely to remain weak. While outlook for petrochemicals segment may be more positive as prices and volumes appear to be recovering faster than expected, we recallthat SPC’s refinery has no exposure to petrochemicals products. Further, with more new refining capacity from India, Vietnam and China coming on-stream in 2H09, we believe SPC could face tough competition ahead. The continual spread of Influenza A (H1N1) may dampen travel activities and result in weaker jet fuel demand. Oil refining margins could also face downward pressure especially in a scenario of slower-than-expected demand for refined products and faster-than-expected rise in crude oil prices, in our view.

We continue to urge investors to accept PetroChina’s Mandatory General Offer for the remaining shares of SPC. The acquisition of PetroChina’s purchase of Keppel’s entire shareholding in SPC, or 45.51% of the total issued share capital of SPC was completed on 21 Jun 09. In addition, PetroChina received valid acceptances of 21.99%, bringing its total percentage of controlled shares to approximately 67.30% as at 21 Jul 09. In accordance with the Securities and Futures Act of Singapore and the Singapore Code of Take-overs and Mergers, PetroChina would continue to make a mandatory conditional cash offer of S$6.25 for every SPC share acquired during the Offer Period. The closing date for the Offer Period will be 21 Aug 09.

FSL Trust: HOLD on covenants and counterparties

Watch for DPU guidance next week. FSL Trust (FSLT) will announce 2Q results next week on 21 Jul. We do not expect any big earnings surprises, and accordingly our attention will be on DPU. The trust had previously guided for 2Q distributions of 2.45 US cents per unit. Two key pieces of information to look out for: 1) whether the distribution reinvestment scheme (DRS) will apply this quarter; and 2) guidance for 3Q DPU. FSLT changed its '100% payout' model in 1Q09, by scaling back payout and instituting the DRS. We have previously noted that the relative success of the DRS in the last quarter may protect the trust's distribution payout ratio from further cuts.

Pre-paying loans may not be enough. Of course, this depends on the trust's lenders reaction to FSLT's attempts to voluntary prepay loans. Last quarter, a total of US$7.8m (roughly 46% of 1Q cash earnings) was earmarked to voluntarily prepay debt. US$3.8m stemmed from DRS proceeds, while US$4m was from retained cash earnings. We note that this amount is still small compared both to total loans and to our expectations of the quantum of the decline in vessel values.

Possibly seeking covenant waivers. We estimate that FSLT's next vessel valuation will be in the Oct/Nov period (but lenders can call for a revaluation at any time). We believe the question here is not really if the loan-to-value (LTV) covenant has been breached but the tolerance level of lenders to such a breach. Peer Rickmers Maritime [SELL, fair value: S$0.39] had previously announced it is negotiating for LTV covenant waivers with its lenders, while US peers such as Danaos [NOT RATED] and Global Ship Lease [NR] have recently announced successful grants/extensions of such waivers. We expect FSLT to also negotiate for the same - in our opinion, it should be able to secure such waivers but our concern is with pricing. A possible cost structure could be a combination of one-time fees along with higher interest margins over the waiver period.

Covenants and counterparties. We have a NEUTRAL view on the shipping trust sector. We like FSLT's diversification but the shipping industry is undeniably facing tough times. As such, our concerns on covenants and counterparty health remain unchanged. Securing an LTV covenant waiver could be an important next step for FSLT. Maintain HOLD with S$0.58 fair value estimate. This values FSLT at a 30% discount to our 'normal' case discounted FCFE value of S$0.83 (10% discount rate).

First Ship Lease Trust (FSLT) is distributing 2.45 US cents per unit for 2Q09, which represents 74% of net cash generated from operations. Retained cash and proceeds of US$3.8m raised from the distribution reinvestment scheme (DRS) in May 09 will be applied towards a voluntary loan repayment of US$8m.

All of FSLT's lessees have been making payments of lease rentals monthly in advance including those in Jul 09. Remains in compliance with loan covenants. 3Q09 DPU guidance of 1.50 US cents. DRS will not be applied for 2Q09.

Yangzijiang - Pure shipbuilder in a prolonged downturn

In line with Nomura’s negative macro view on the merchant shipping and shipbuilding sector, we suggest that investors should avoid pureplay shipbuilders since the oversupply in both bulk and container ships (particularly in the mid-sized segment), following the past three years of strong new-building orders, is likely to lead to prolonged weakness in the commercial new-building orders.

Also, while the privately owned Chinese shipbuilder has managed to keep cancellations at bay, with no announcements made as of yet, we believe these risks remain. Management stated the group has secured significant upfront payments, which will likely deter cancellations, although for those customers who are hard put to secure financing, the decision to cancel the project may be the only option, in our view.

The group has highlighted it is one of a few shipbuilders in China which is eligible for the shipbuilding stimulus scheme, and that the group will actively work with banks to help its customers apply for financing. However, we believe the stimulus measures, for which there are still very few details, are more likely to favour the stateowned yards, and could turn out to be too little, too late or not relevant for some shipowner customers, particularly the overseas shipowners, which make up the bulk of Yangzijiang’s customers.

YZJ’s order backlog stands at US$6.7bn as of 1Q09, with 149 vessels scheduled for delivery into 2011-12, according to management. In FY08, the group delivered 27 vessels, amounting to 850,000 deadweight tonne (DWT), which makes it one of China’s top 10 most productive yards.

The group expects to deliver 41, 45 and 50 vessels in FY09, FY10 and FY11, respectively, from its US$6.7bn backlog, which we believe should be achievable based on its execution track record but only if there are no cancellations or delivery postponements. Its US$6.7bn orderbook comprises 76 containerships (1.73mn CGT at US$4.3bn) and 73 bulk carriers (1.03mn CGT at US$2.4bn), according to the group’s management.

With a sound shipbuilding history going as far back as the mid-1950s when it started as a state-owned shipyard, YZJ has built up a reputable business and claims strong client relationships with its major customers, which include Canadry (Italy), Carisbrooke Shipping (UK), Cosco (China), D’amato (Italy), Formasa Taiwan, Guangdong Yudean (China), Hansa Shipping of Germany, IMS Shipping (Italy), Reederei B. Rickmers, Peter Dohle Sciffahrts KG and Seaspan of Canada.
While we have raised our FY09F and FY10F earnings by 17.3% and 8.8%, respectively, to account for the group’s 1Q09 results, we still expect the group’s earnings to show a decline from FY08, given the continued drought in new shipbuilding orders.

We maintain our REDUCE rating on YZJ, with a price target at S$0.48 (from S$0.37) based on our upward earnings revision for FY09-10F on the back of strong 1Q09 results. Our price target is based on a discounted cashflow valuation, with a WACC of 12%, which is the same as that used for Cosco Corp. YZJ is trading on FY09F and FY10F PE of 10.4x and 11.5x, respectively, which is ahead of its Korean counterparts. Given our bearish view on shipbuilding as a whole, we believe YZJ’s valuations are not at a significant discount to warrant a Neutral rating, and retain our REDUCE rating. While we appreciate that management has raised dividends, the yields remain relatively less attractive vs the Singapore yards, although we highlight that FY09F and FY10F average ROE remains creditable at 20% and 15%, respectively.