NOL Neptune Orient Lines - No turnaround in near term

We believe container freight rates have not bottomed out yet and are likely to trend lower. Despite cost saving initiatives, we estimate NOL will likely continue to report quarterly losses. With 39% potential downside to our revised price target of S$0.85 (previously S$0.90), we maintain our REDUCE rating.

Freight rates continue to decline? We believe freight rates are set to decline with annual transpacific rates to be concluded more than 10% y-y lower. Further, a return of the global laid-up and idle capacity will likely place further pressure on Asia-Europe and Intra-Asia freight rates.

Leading to quarterly losses to continue: Even before the potential rate decline, we estimate that int'l routes are experiencing losses. Despite NOL's attempts to reduce costs, we believe the company is likely to continue reporting quarterly losses with volumes still significantly lower (although volumes would still improve sequentially this year).

We maintain our REDUCE rating on NOL, as we believe it is too early to call for a trough in container freight rates. In fact, we believe freight rates are under pressure and could decline in the near term, from conclusions of annual transpacific freight rate negotiations (some contract negotiations are still ongoing) and our expectation that shipping lines are unable to impose any peak season surcharges. We expect NOL and other container lines to continue to report quarterly losses as international routes continue to experience losses.

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Swiber - Placement 0f 84m shares at 88 cts

Size: Up to 84,000,000 new shares, (approx 19.9 % of existing share capital)
(Note 30m shares anchored and the balance will be on an accelerated book building process)


In view of the recent rally in the market, the Swiber Management has agreed to price the placement of the 10-day VWAP which works out to a 7.7 % discount to the 10-day VWAP off S$0.9531.This is a 16.2% discount to the last done price of S$1.05.

ASL Marine - Heading lower in the near term

ASL Marine is likely to face more correction pressure in the days aheadfollowing the formation of a bearish engulfing and tweezers top pattern atthe key gap zone resistance level (end Sep ’08).

With the RSI indicator now falling out of the overbought region, coupledwith the MACD and Momentum indicators turning sharply lower with likelybearish crossovers soon, they seem to support our view that the sellingmomentum could persist in the near term.

We expect the correction to find an initial support at $0.685-$0.71 (gap inearly May ’09), failing which, we see the next key support at $0.57 (upperboundary of 6.5-month uptrend channel and resistance-turned-support level)

Immediate resistance is pegged at $0.93 (2009 high), ahead of $1 (support-turned-resistance level).

Jaya Holdings – Takeover exercise by Nautical Offshore at $0.70?

Jaya Holdings Ltd., a vessel-chartering company majority owned by Affinity Group’s Nautical Offshore Services, soared to its highest level in seven months amid hopes charter rates will remain firm.

Jaya has broken above its KRL at $0.58; more than 61m shares were traded yesterday suggesting that momentum is in place. We believe Jaya has upside to $0.72; recommend buy with stop-loss below $0.57.

Market grapevine moots another theory that Nautical Offshore, who is Jaya’s 54.8% majority shareholder, may be launching another takeover exercise for Jaya. Nautical Offshore is a wholly owned unit of U.S. based Affinity Group. Considering Nautical’s last $1.45/share general offer for Jaya in 2007, the huge discount implied in Jaya’s last traded price of $0.60/share does open up this possibility. Taking a reasonable test, a $0.70 takeover price would imply valuations of 6x PE (2009E) and ~1.3x P/B. As a comparison, this compares well with ASL Marine, which we estimate to be valued at 3.2x PE (2009E) and 1x P/B.

Keppel - Valuations still attractive

In the running for new FPS orders. Trade publication, Upstream, recently reported that Keppel O&M has jointly collaborated with J Ray McDermott to tender for a spar construction contract for work in Kodiak Field, Mississippi, Gulf of Mexico. Separately, we read that Keppel has also expressed keen interest for eight of Petrobras’ hull construction contracts. While we are unable to verify the status of the projects at the point of writing, we remain confident that these bids would translate to new orders momentum, given Keppel’s quality deliverables and strong track record. As such, we raise our new order estimates from S$2.2b/S$2.6b to S$3.0b/S$3.5b for FY09F/10F. Thus, our FY10F net profit is raised by 5%.

O&M customers’ concerns somewhat alleviated, except for Skeie Drilling. Skeie Drilling (of which Keppel owns 5%) is currently constructing three jack-up rigs at Keppel FELS, and the delivery deadlines have been extended by 4-6 months with the last jack-up due in Jun 2011. According to Skeie’s 17 Apr’s press release, Skeie requires a total capex and funding requirement of US$1.6b and would be seeking bondholder meetings to conclude this new capital raising by late May 09. While we remain cautious on customers’ non- payment in the near term, we expect fewer such events to happen as credit conditions improve, going forward.

Valuations below normalised levels, even after the recent share price rebound. Keppel O&M’s trading valuations at an implied 10.1x FY09F P/E and 12.3x FY10F P/E, are still lower than normalised levels, even after the recent share rebound. Given the more optimistic outlook and new order flow momentum, we have changed our valuation framework to P/E from P/B, applying 16x P/E on FY10F EPS for Keppel O&M. We have also updated DMG’s target prices and share prices of the listed entities, deriving a new target price of S$7.96 (from S$5.24 previously), representing an upside of 17.4%. Upgrade from NEUTRAL to BUY.

SembCorp Marine - Sustained margins and high ROE are positives

PetroRig I – twist in outcome, but SCM maintains confident to sell rig. SCM is currently in the midst of selling PetroRig I, though there appears to be some difficulties as SCM’s wholly owned subsidiary, Jurong Shipyard (JSPL) received an injunction to proceed with the sale. Nonetheless, we believe JSPL is able to recover the final payment through the sale of PetroRig I, though this may take a while longer than expected.

Better-than-expected margins. SCM turned in better-than-expected operating profit margin in 1Q09 for the third consecutive quarter. We opine that this ascertains SCM’s capability and efficiency for rigbuilding as the first quarter is a seasonally slow quarter for higher-margin shiprepair and thus, the revenue profile for the first quarter is skewed towards rigbuilding. We expect subsequent quarters to record better profit margins than 1Q09. Increasing ROE track record. SCM’s ROE has consistently trended up from FY02. We believe this demonstrates its commitment towards delivering returns.

SCM is currently trading at a P/E of 11.0x/11.7x on FY09F/FY10F EPS. Given the slightly clearer outlook ahead, SCM’s trading valuation looks inexpensive, compared to its mid cycle historical P/E band of 16x, backed by its record backlog orders and quality deliverables. We derive our target price of S$3.04 (from S$3.02 previously) based on sum-of-the-parts valuation. We value SCM based on

• P/E of 16x FY10F earnings for its niche rig building/repair business sector
• SCM’s 30% stake in Cosco Shipyard Group (CSG)
• 4.98% equity interest of Cosco Corp’s share at Cosco’s Target Price of S$1.14. (based on our revised fair value estimate for Cosco)
• Applying a 15% discount, considering the near term risk from its customer.

Maintain BUY.

Swiber - Slower contract flows

Results largely in line with expectations. Swiber Holdings (Swiber) reported a 22.9% YoY rise in revenue to US$87.1m for 1Q09 but this was a 15.4% QoQ decline. Net profit fell 5.0% YoY to US$9.8m, affected by lower gross profit margins (20% in 1Q09 compared to 26% in 1Q08). This is largely in line with expectations. The lower gross profit margin was mainly due to the roll-over effect of delayed deliveries of the group's pipelay barge and dive-support work barge in the previous quarter. Operating profit (excl. one-off items) was S$11.6m compared to S$12.9m in 1Q08.

Decreasing order book. The group's order book is now US$515m as at 31 Mar 09 compared to US$596m as at 31 Dec 08. Slower order flow should hardly be surprising, given lower oil prices and the global economic downturn. We note that so far about US$70m worth of contracts were secured in 1Q09 compared to about US$470m (including the US$250m CUEL contract) in 1Q08. Management, however, is optimistic about obtaining contracts from Saudi Aramco's US$60b investments in oil and gas production over the next five years, especially after forming a joint venture with a leading Saudi Arabian company, Rawabi Holding Co Ltd, which could increase the chances of securing contracts.

Little room for error. The group's net debt-to-equity ratio has eased from 1x as at 31 Dec 08 to 0.94x as at 31 Mar 09. It is imperative that deliveries of vessels under the sales and leaseback agreement are on time so as not to impact its cashflow (out of 15 sale and leaseback deals totaling US$408m, eight have been delivered). Management does not anticipate any more delays in vessel deliveries from reports of project management teams stationed at yards. The group mentioned that the delivery schedule is still in line so far.

Maintain SELL. We are keeping our FY09 estimates but lowering FY10 estimates by 13% with lower contract flow assumptions. However, we are raising our fair value estimate to S$0.66 based on 6x FY09F core earnings (peers trading around 7x) with lower risk aversion in the market and a re-rating of the sector. At current price, the market appears to have run ahead of Swiber's fundamentals and it is prudent to note a few things 1) slowdown in orders, 2) relatively high leverage, and 3) little leeway for hiccups in project execution. We maintain our SELL rating on the stock.

Keppel Corporation: Cash bonanza from sale of SPC; FULLY VALUED

Surprise proposed sale of SPC. Keppel Corp (KEP) announced that its entire 45.51% stake in listed SPC Ltd would be sold to PetroChina International (Singapore) Pte Ltd. This deal is conditional upon the approvals and consents from authorities in Singapore and China.

A good deal for KEP. The proposed sale will reap cash for KEP, amounting to S$1.47b or S$6.25 per SPC share (at 15.6x FY09 PE and 1.8x px to book). The cash proceeds are S$0.92 per KEP share, raising KEP's net cash to about S$1.6b. A special dividend payout is possible, and our assumed dividend payout ratio is raised to 90% for FY09, generating yield of 7.5%.

Don't forget the uncertainty from Rowan contracts. As a recap, Rowan has previously placed orders for four Super 116E class newbuild jackup rigs with KEP. This client is now seeking payment re-negotiation on all its four jackup rig orders, and may potentially cancel its fourth order with KEP. Assuming the remaining payments for all four jackup rigs to be payable upon deliveries, we estimate that KEP needs to self-finance US$430-550m of the construction costs.

Maintain FULLY VALUED on KEP. Our fair value for KEP is adjusted to S$5.13; due to the offer price for SPC, and the higher share price for listed Keppel T&T. KEP's current price remains expensive, as it implies 21x FY10 PE for its O&M. Maintain FULLY VALUED.

Sembcorp Marine: Unaware of legal proceedings

SCM unaware of legal proceedings brought upon by PetroRig I. Sembcorp Marine (SCM) made a press release last evening, expressing that its wholly-owned subsidiary, Jurong Shipyard Pte Ltd (JSPL), was not aware of an action by PetroRig I Pte Ltd against Jurong Shipyard over the termination of the construction contract for PetroRig I. JSPL added that it had not received any official notice of such US proceedings. Even if there was such an action, JSPL would firmly defend it as it believes it had acted properly under the terms of the construction contract. JSPL maintains that it would proceed with the sale of the semi-submersible, PetroRig I, as advertised, with the bids closing at noon on 20 May 09.

SCM remains confident it is able to sell PetroRig I. As we recall, SCM is currently in talks with three potential international drilling contractors for the sale of PetroRig I. While we believe JSPL is able to recover the final payment through the sale of PetroRig I, we remain concerned over the remaining instalments amounting to US$505m for PetroRig II and PetroRig III. We think the relationship between SCM and PetroMena may be strained as a result of this incident.

Nevertheless, SCM’s healthy balance sheet is able to take on the remaining capex. SCM is in a healthy net cash position of S$1.9b, of which S$1.2b is progress billing in excess of work-in-progress. Assuming a gross profit margin of 14% and outstanding work of 40% and 60% on PetroRig II and PetroRig III respectively, SCM requires cash of US$435m (S$653m) to complete the remaining works. We believe SCM’s healthy balance sheet will be able to take on the remaining capex on these two semi-submersibles. Maintain BUY, Target S$3.06.

Ezra Holdings Ltd: Potential catalysts from EOC

Pre-emptive placement. Ezra Holdings (Ezra) reported on 21 May 09 that it will be placing out up to 78m new shares at S$1.185/share (9.8% discount from 20 May 09 VWAP price); this to raise about S$92.4m in gross proceeds. The 78m new shares represent 13.4% of its existing share capital. While Ezra indicated a wide range of possibilities for the use of the proceeds, we think this placement is pre-emptive in nature to leverage on the improved equity climate for its future growth plans. As long-term financing has been secured for its previous capex plans, we think the cash will go to growing the company through other avenues.

Arunothai updates. We are sticking to our estimates that EOC's Lewek Arunothai will start billing in May 09. During the last quarter's briefing, management updated that it has started production and is in the final stages prior to operation proper. With this asset operational for a 5-year time frame, it will provide good cash flow for EOC to embark on new projects. Experience gained in FPSO work will prove useful for the Chim Sao project.

Chim Sao field update. Upstream Online reported on 20 May 09 that PetroVietnam has exercised rights to 15% of Premier Oil's Block 12W Chim Sao field in Vietnam. The block now has four stake holders: Premier Oil (31.875%), Santos (31.875%), Delek Energy (21.25%) and PetroVietnam (15%). Premier Oil has indicated that plans for an FPSO asset is being finalised although a firm timeline was not mentioned. From previous newsflow, we believe EOC continues to be the front runner to provide and operate the FPSO. We expect EOC to try to manoeuvre its high net gearing of 2.4x (majority LT debt) by gathering equity partners for the FPSO vs. engaging in more debt financing. While this reduces balance sheet burden, it will dilute EOC's attributable profit from the project. Despite this, we think it is a good opportunity for another long-term operating asset.

Maintain BUY. Ezra remains one of our favourites for the sector with its relatively defensive earnings. However, we caution that the economic situation overhang might put a drag on further bouts of aggressive price appreciation. We have adjusted our pegs to cater to better sentiments and early cycle valuations; our SOTP fair value is raised to S$1.46 (prev. S$1.00) and we maintain BUY. Without the placement, our fair value would have been S$1.63.

Keppel Corp divests SPC for S$1.47b

To sell 45.51% stake (234.5m shares) in Singapore Petroleum Company (SPC) to PetroChina International (S), a subsidiary of PetroChina Company Ltd for S$1.47b or S$6.25 per share in cash. The purchase consideration is at 24.0% premium to SPC's last closing price.

Keppel will realise a gain of S$660mm, thus increasing its NTA/share from S$2.84 to S$3.26.

PetroChina is required and intends to make a mandatory general cash offer for the remaining shares in SPC.

Assuming transaction is completed by end-09, our FY09 net profit would rise by 72% from S$920m to S$1.58m factoring in the S$660m gain. FY10 and FY11 net profit forecasts (indicative of operating earnings) would be reduced by 18% and 21% respectively to S$707m and S$590.7m. Revised EPS for FY09, FY10 and FY11 at 99.2 cts, 44.4 cts and 37.1 cts respectively with PEs at 7.0x, 15.7x and 18.8x.

Our revised sum-of-the-parts for Keppel is S$5.90/share, factoring in the S$1.47b selling price for its SPC stake. And also factored in a higher ex-rights target price of S$2.35 for Keppel Land (S$1.70 previously). Our previous SOTP was S$4.85/share.

Special dividend from the divestment proceeds is likely. Maintain SELL on Keppel as share price is significantly above our revised target price of S$5.90. With the divestment of SPC, Keppel will become a less compelling oil play.

ASL Marine Holdings Ltd: Diverse exposure to various industries

Marine services group. ASL Marine Holdings Ltd (ASL) is a marine services group engaged in shipbuilding, shiprepair, shipchartering and other marine related services with customers in the Asia Pacific, South Asia, the Middle East and Europe. The group owns and operates shipyards in Singapore, Batam (Indonesia) and Guangdong (China) besides a fleet of 188 vessels. In 3Q09, group revenue rose 16.6% YoY to S$106.9m while net profit rose 65% to S$23.4m, but this includes a gain of S$12.2m on the disposal of ASL Energy, a jointly-controlled entity.

Niche position in tugs and barges. The group specializes in the building and repair of tugboats and barges, though it has moved up the value chain and also builds and repairs other kinds of vessels including offshore support vessels. Its shipchartering fleet also comprises mainly tugs and barges with many of them engaging in dredging, land reclamation and infrastructure development, among other activities. Even if the offshore market weakens because of low oil prices, the group may be able to obtain business from domestic infrastructure construction projects such as port expansion.

Integration of businesses gives rise to flexibility. ASL builds vessels to order as well as for its shipchartering operations. Should demand opportunities arise, the group also sells its vessels to earn profits. The group's shiprepair operations also enable it to have better control over repair schedule and costs of its fleet. Finally, shiprepair and shipbuilding share similar facilities, equipment and labour, hence lowering its operating costs.

Initiate with BUY and fair value estimate of S$1.03. We initiate coverage on ASL Marine with a BUY rating and fair value estimate of S$1.03 based on 6x FY10F core earnings, in line with peers. Its strong order book of S$582m which extends to FY11 also lends earnings visibility though we note that new order flow may be minimal going forward due to current tough market conditions. However, its diverse income stream from three segments (shipbuilding, repair and chartering) should help to reduce its dependence on a single sector.