Keppel Corp - Now A Big One Up On Semb Marine

Business Times reported on Jun 27th that Keppel Offshore & Marine (KOM) may have out- maneuvered Semb Marine in taking a 70% stake in a new shipyard project in southern Brazil which could cost at least US$850 mln.

(The JV partner is W Torre Empreendimentos Imobiliarios, WTorre, a large and established group with expertise and capabilities in civil and engineering infrastructure development in Brazil. And the shipyard is located in the southern Brazilian city Rio Grande, which will have a dry dock that is to be the largest and the first purpose-built facility to be built in Brazil in 30 years.)

Semb Marine had on Oct 1st ’07 signed a MOU with WTorre to own and operate the yard. There has been no indication as to the status of this MOU.

The new shipyard project is particularly significant, given the imminent closing of Petrobras’ tender for the hull construction of 8 Floating Production Storage & Offloading vessels (FPSOs), as the massive Tupi oil field (with estimated 5-8 bln barrels of oil reserves) gears up to commence production. Brazil’s oil reserves stand at 12.6 bln barrels, ahead of Mexico, but well behind Venezuela in Latin America.

While the final outcome is still unclear, the latest news is likely to boost sentiment in Kep Corp shares, and unfortunately the reverse, at least in the short- term, for Semb Marine.

We have a BUY on both stocks. (Both companies count Petrobras as one of their key customers. In fact, Semb Marine, which has been in Brazil since 1997, has converted the most number of vessels for Petrobras: 6 FPSOs, I FPU and 2 FSOs. KOM, on the other hand, delivered the P-51 FPU to Petrobras in Nov ’08, the second after the P-52, and to be followed by P-56 that it is currently working on.)

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KS Energy: Fixed charter rates lend visibility in an uncertain environment

Volatility persists in oil prices. The price of crude oil has risen more than 50% this year, hitting a high of about US$73/barrel on 12 Jun 09. The correlation between oil and equity prices has also increased significantly since the financial meltdown last September. With an unwinding of the Armageddon scenario and improving investor sentiment, global risk appetite increased. This and various concerns about the strength of the USD with the huge amount of quantitative easing underway led to a weaker dollar, fueling higher oil prices. However, crude oil price seems to be facing some resistance currently with fatigue in the equity market, falling to about US$68/ barrel two days ago.

Looking for a real demand for oil. Demand for oil ultimately depends on economic recovery, and economic indicators are showing more positive signs in general. OECD composite leading indicators point to a slower pace of deterioration in most of the OECD countries with possible troughs in countries like China and the UK. The US Conference Board leading index of consumer expectations also improved significantly from a low of 50.5 in February this year to 69.4 last month. However, a proportionate increase in the demand for crude oil and oil products seems elusive. Demand from OECD countries for oil products remains low (Exhibit 1), though some form of stabilization is expected, if leading indicators sustain their upward trend.

Fixed charter rates. Jack-up day rates have been affected by lower oil prices, but KS Energy's contracts are based on fixed charter rates, so lower spot rates are unlikely to impact the group adversely for now, unless oil prices trend significantly lower and customers negotiate for lower rates. Things should be looking better for the group's customers with the recent recovery in oil prices.

Maintain HOLD. 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. As the current level of oil price is still unable to induce a full recovery in overall E&P activity and markets remain relatively volatile, we maintain our HOLD rating and S$1.36 fair value estimate on the stock. However, the inventory restocking of commodities by China and possible oil speculation by institutions may contribute to higher oil prices despite soft fundamentals, which would lend support to the stock price.

SembCorp Marine - Maintain Hold; TP S$3.00

We keep our earnings estimates unchanged, but raise our target price to S$3.00 from S$2.30 based on a sum-of-the-parts valuation. For the core O&M business, we use a target Dec FY10E P/B of ~4x (raised from 3x), which is the average PB multiple in the recent cycle.

Our earlier upgrade on SMM from Sell to Hold was partially driven by our view customer cancellation risks have already been priced into the stock. Financing issues remain for a few selected customers, and could likely lead to selling pressure, but we like SMM's strong footing in fixed production platforms. The acquisition of SOME has established itself as a strong beneficiary from the strength in the production cycle.We see upside risks to our earnings forecast.

We value SembCorp Marine on sum-of-the-parts valuation, giving us a target price of S$3.00. For the core O&M business, we use a target Dec FY10E P/B of 4x, which is the historical average PB multiple of the recent cycle. We use P/B as our valuation approach for shipyard value as shipyard earnings have become less visible in the face of a slower orders momentum. We use 2010E valuation for the O&M sector as the bulk of the existing order book will be recognized by 2010. We derive our fair value estimate for SMM's 30% stake in Cosco Shipyard Group based on our valuation for COS's shipyards. We value SMM's 5% stake in COS based on our COS target price of S$1.20.

Keppel Corp - Maintain Buy; Raise Target Price to S$7.60

Keppel Corp remains our top pick in the O&M sector. Keppel's long and established operating history in Brazil also suggests it is well positioned to benefit from Petrobras orders. We are also comfortable with Keppel O&M’s order book quality as the biggest customer overhang – Skeie Drilling and Production (est. 14% of order book) – has been removed: Skeie recently announced a successful restructuring plan to enable it to stay solvent and complete construction of all 3 jack-ups at Keppel.

Divestment of SPC has also strengthened Keppel's balance sheet to engage strategic M&A growth. We believe the group’s restructuring efforts will be geared towards revenue/earnings which are less cyclical (vs SPC refineries).Accretive acquisitions which can harness synergies with Keppel Land and/or KIE may provide further upside to valuations.

At the same time, Infrastructure prospects has room to improve further, on back of recent contract wins and demand for green technology.

Our S$7.60 target price is based on a marginal discount to our per-share RNAV estimate of S$7.64, applying a 15% discount to the value of Keppel's investments in M1 and K1 ventures as we see Keppel as a passive investor in these ventures. For the group's O&M business, we use a target Dec FY10E P/B of 4x, which is the historical average PB in the recent cycle. We use P/B as our valuation approach for shipyard value as shipyard earnings have become less visible in the face of a slower orders momentum. We use 2010E valuation for the O&M sector as the bulk of the existing order book will be recognized by 2010. For Infrastructure we use ~10x FY10E P/E, in line with the industry average as earnings is set to grow from a low base; and we value Keppel Corp's 53% stake in Keppel Land based on target price for Keppel Land of S$1.94.

Rickmers Maritime - Sell: Not Mission Impossible, But Too Much Uncertainty

Challenging, but not Mission Impossible – Following the easing of credit crunchand a strong 86% rally of Rickmers’ (RM) share price from its low in Apr-09,we conduct a hypothetical scenario analysis to assess the possibility of a capital raising exercise to meet RM’s funding gaps on a sustainable basis.
Theoretical solution 1 – Based on our analysis, a sustainable solution could be to raise US$300m in 2Q10 at S$0.60/share and implementing a US¢1/qtr dividend policy. This would provide an attractive dividend yield of 9-10% for unit holders, meet RM’s financing needs, and still set aside sufficient reserves to repay debt. Clear communication of RM’s dividend policy may be necessary to restore investor confidence before the capital raising exercise in 2Q10.

Theoretical solution 2 – An alternative solution could be the issuance of a debt-equity hybrid instrument such as non-participating preference shares in 2H09, with conversion into ordinary shares when the assets are delivered in July 2010. This solution would have the added immediate advantage of removing the overhang surrounding the unfunded capex commitments.

Caveat emptor applies – We caution that the above are hypothetically possible scenarios to meet RM’s funding needs on a sustainable basis. The challenges facing RM are not impossible to surmount; however, there exists tremendous uncertainty on the exact terms of any capital raising exercise, as well as on RM’s operating environment. As a result, we maintain our Sell/Speculative Risk rating; the “safety floor” share price is equal to our target price of S$0.23, based on NTA/share with 25% discount to vessel book values.

ASL Marine: No surprises in 3QFY09

3QFY09 results – no surprises. ASL Marine (ASL) released its 3QFY09 results yesterday. Revenue improved 17% YoY (but declined 1% QoQ) to S$106.9m, while core operating profit (excluding gains on disposal of ASL Energy and other assets as well as allowance for doubtful debts) was S$15.2m (-18% YoY, - 15% QoQ). The decline was due to lower profit margins achieved for shipbuilding (as a result of increased cost provisions on selected projects), and shiprepair (from lower volume of shiprepair jobs undertaken during the quarter). 3Q09 net profit was in-line with management’s guidance as well as our expectations.

Orderbook provides earnings visibility till FY11. As at 31 Mar 09, ASL has an outstanding orderbook of S$582m (from S$663m as at 31 Dec 08) for deliveries of 35 vessels to external customers. Separately, ASL also secured S$22m worth of orders for shiprepair and ship conversion projects including fabrication and outfitting works to a Heavy Transport Vessel and conversion of tanker into a FSO unit.

Settlement on rescission of shipbuilding contract and thus, oil tanker to add to ASL’s fleet. In late Apr, ASL announced that it had reached a settlement with a customer on the rescission of a contract to build an oil tanker. According to the management, under the terms of the contract, the customer was required to accept delivery of the vessel upon completion. However, the customer was unwilling to do so until all the outstanding items were settled. As this matter could potentially lead to a protracted, costly arbitration, the management then decided to cancel the contract, refund the customer US$18.8m (equivalent to the total payment by the customer to-date) and take ownership of this oil tanker. The management disclosed that they are currently in the process to charter this vessel.

TP raised to S$1.07, maintain BUY. Our core FY09 operating profit remains unchanged but the net profit is raised owing to increased gain on disposal of PPE as part of ASL’s fleet renewal programme. We have also reduced our FY10 margins in view of higher operating cost incurred. Given the recent sector re-rating, we ascribe a valuation metric of 6x (in-line with ASL’s peers) FY10 to recurring EPS. As such, our target price is now S$1.07 (from S$0.55 previously). Maintain BUY.

Mermaid Maritime: A niche offshore play

High earnings visibility from tender rigs. Mermaid provides niche tender rig drilling to the production phase of offshore oil fields in South East Asia. These contracts are typically long-term in nature, and stretch 2-5 years. We expect growth of this business to be underpinned by: 1) Higher utilisation of its tender rigs, with mandatory servicing after every five years completed in mid-2008, 2) Impending rig delivery by early FY10, and 3) Re-pricing of tender rig contract up by 27-33% (using rates secured in February 2009), vs. contracted rates in mid-2005 and early 2006.

Versatile and specialised subsea services. Mermaid has a fleet of subsea vessels/equipment and tender rigs, and an experienced group of in-house/sub-contracted divers to provide customised services to its clients. We believe that our earnings forecasts are realistic after factoring in 0-17% dip in charter rates for Mermaid’s specialized subsea vessels, in view of: 1) the mild 0-12% dip to-date (vs. peak levels), and 2) Stable rates for recent contracts in early June 2009.

BUY into strong growth in FY10. We expect Mermaid to deliver 60% net profit CAGR in the FY10-11 periods (FYE Sept). Note that Mermaid’s recurring net profit is projected to dip 20% y-o-y in FY09 to Bt933.6m, due to a one-off poor 2Q09. Despite committed capex for one tender rig and two vessels, Mermaid’s net gearing is a healthy 0.3x in FY09-10. We are initiating coverage on Mermaid with a BUY recommendation, with a fair value of S$0.85, based on 7x and 10x blended FY09/10 PE for its subsea engineering business and drilling services respectively.

Rickmers Maritime - Share Price May See Re-Rating Should Capex Funding Be Resolved

We met up with the management of Rickmers Maritime (RMT) yesterday. The trust is still evaluating options to resolve the funding of four containerships of US$712m to be chartered out to Maersk in 2H10. Should this funding issue be resolved, its share price may see a re-rating.

Four possible options on the unfunded capex. They are: a) equity/debt funding, possibly on 30:70 basis (in our opinion), b) selling the vessels, c) sale and leaseback and d) settlement with Rickmers Group, the original owner of the four vessels. A total deposit of US$40m (5.6% of vessel cost) for the vessels is payable to RMT’s parent company Rickmers Group one year before the expected delivery date ie. Jul-Sep 09. The balance amount of US$672m (94.4%) will be paid upon delivery of the vessels in 2H10.

Correction in ship prices might have breached LTV covenants. RMT’s management has guided containership prices without charter contracts have fallen about 30-50% from the peak in 2008 and only expects the shipping market to pick up in two years’ time. We do not rule out a breach in RMT’s loan-tovalue (LTV) covenants of 90% in view of the recent collapse in ship values. That said, a lot of shipping companies have breached their loan covenants and bankers look for win-win situations, as it is not a solution to take possession of ships. RMT is in discussions with its bankers on the possible waiver of the LTV covenants.

Maintain HOLD, fair price S$0.76. We forecast DPU yields of 19.6% and 17.6% for 2009 and 2010 respectively. While our fair price of S$0.76 is 28% above its current share price, we maintain our HOLD call in view of its unfunded US$712m capex due in 2010. However, we see a re-rating in RMT should the trust manage to resolve its financing hurdle.

Jaya Holdings: Seeking debt re-structuring

Jaya is seeking debt re-structuring with its creditors. Jaya indicated that the weak industry outlook has resulted in some bankers expressing their reluctance to roll-over and/or extend existing credit facilities granted to the group. Given the slower than usual disposal of vessels and the global credit crunch, Jaya is finding it increasingly difficult to generate sufficient internal cash flow to self-fund its AHTS newbuild capital commitments of more than S$700m as of end June 2008.

Jaya is seeking to restructure its debts with creditors, and has appointed nTan Corporate Advisory Pte Ltd as its independent financial advisor to the group. The scope of advisory works include assisting Jaya to review and develop strategic options, and to better rationalize and optimise its operational activities, financial arrangements and capital structure.

Jaya and its advisors will seek the support of bankers for a standstill of repayment of amounts owing to them, pending a consensual restructuring of the group's operational activities and financial arrangements. Meanwhile, Jaya will still operate its business as per normal.

Jaya's net gearing is projected to reach 1.4x by end FY10 (FYE June), and may even go to as high as 2.0x should there be only two vessel sales in the financial year. Indeed, we had recently reiterated that Jaya’s net gearing could step up to 0.92x by end FY09 (vs. 0.66x currently), after taking into account its expected vessel sales and charter income.

Swiber Holdings: 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.

FSL Trust: Reinvestment Scheme results

Distribution Reinvestment Scheme (DRS) results. FSL Trust (FSLT) announced that unitholders holding around 155.5m units or 30.9% of the total number of issued units have elected to receive 1Q distributions in the form of units. FSLT has issued about 15.6m units, increasing the total outstanding unit base to around 518.7m units. The manager said that this level of participation was stronger than expected.

Prepaying loans. Proceeds (or retained cash) from the DRS amount to US$3.8m, have been earmarked for voluntary debt repayment. Recall that FSLT had already retained US$4.6m or 27% of 1Q cash earnings, of which US$4m was used to repay debt (also voluntary). In aggregate, FSLT will prepay US$7.8m, or roughly 46% of 1Q cash earnings and 1.5% of total loans. Using 1Q data, its gearing post-prepayment comes to around 1.37x debt-to-equity. Retained cash in 2Q09 will again be used to prepay loans.

Implications for LTV. Loan-to-value covenants are a key concern for the shipping trust sector in light of the 'new world order' of falling asset values and low lender risk appetite. The manager's decision to launch the DRS and to voluntarily reduce FSLT's payout ratio is a pre-emptive gesture of good faith to lenders. In FY09, FSLT could potentially pay off US$16-31.2m (annualized, without and with the DRS) or 3.1-6.1% of total loans. 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. But whether this level of prepayment is a gesture, or a game-changer, is up to the trust's lenders. The ball is in their court, now.

Implications for DPU. We had previously suggested that outcome of the 1Q09 DRS may affect FSLT's course of action going forwards. The DRS was a success, relatively speaking. FSLT now has more options, in our opinion - we believe it may prefer to keep the scheme in play rather than making further cuts in the distribution payout. Deterioration in the external environment, or adverse feedback from the lenders, could of course tilt this decision the other way. Our updated earnings estimates assume the DRS will apply for the whole of FY09. Our new fair value estimate is S$0.58 (up from S$0.45 previously). This values FSLT at a 30% discount to our 'normal' case discounted FCFE value of S$0.83 (10% discount rate). We believe this is a fair reflection of the shipping environment today. Maintain HOLD.

Swiber Holdings: Fund working capital through placement

Placement of new shares. Swiber Holdings (Swiber) announced a proposed placement of 84m new ordinary shares at an issue price of S$0.88 per placement share to raise proceeds of S$73.9m last Friday. The issue price represents a 16% discount to last Friday’s closing price of S$1.05. The appointed share placement agent CIMB-GK Securities has agreed to use their best efforts to procure the subscription and payment for the placement shares. Completion of the placement is conditional upon in-principle approval from the SGX.

Dilutive impact on EPS but lower gearing resulted. The new shares of 84m represent 19.9% of Swiber’s existing issued ordinary share capital of 421.4m shares. As such, this placement deal will dilute FY09/10 EPS by 16%. In addition, net gearing will be lowered by 34ppt for FY09 to 0.62x following the completion of the placement.

Net proceeds used for general working capital purposes. In the circular released, Swiber estimated that it would raise net proceeds of S$71.8m (after deducting expenses incurred in connection with the placement and assuming that all the placement shares are sold), and the bulk of it would be used to fund working capital needs. We believe some cash may also be set aside for the repayment of Swiber’s outstanding notes maturing in 3Q10 (US$71.2m) and 1Q11 (US$72m). We are relieved that Swiber’s outstanding committed capex of US$318m is fully funded through sale-and-leaseback, secured bank loans and vessel disposal.

Declining orderbook and subsequently, earnings deterioration, is another worry. Swiber has an orderbook of US$515m currently. While Swiber noted that it has submitted or intended to submit bids for contracts amounting to US$5b, we remain concerned over Swiber’s success rate to clinch new orders and Swiber’s execution capabilities vis-a-vis its competitors.

SELL into strength. Over the past month, Swiber’s share price (+119%) has outperformed the STI (+21%) and its US peers (+19%). We have raised our valuation parameter from 3x to 9x (30% discount to the global EPCIC peers’ average of 12x) on FY10F recurring EPS as a result of sector re-rating. Thus, our target price becomes S$0.56 post completion of placement. We advocate investors to sell into strength, as we believe Swiber’s share price will continue to be pressured, first by concerns over declining orderbook and execution capability, then by signs of weakness in earnings quality. Maintain SELL.

Ezion Holdings – Fund raising exercise for asset acquisition

To raise gross proceeds of S$43.4m through proposed share placement exercise – Ezion is raising gross proceeds of S$43.4m through a proposed share placement of 70m new ordinary shares at 62 cents each, representing a discount of 8.01% to the volume weighted average price of $0.674 traded on June 4. The placement shares represent approximately 10.88% & 9.81% of the Group’s issued and enlarged share capital (excluding treasury shares) respectively.

80~90% of proceeds for acquisition of offshore and marine assets – 80~90% of the gross proceeds, after deducting expenses, will be used for the acquisition of offshore and marine assets while the remaining 10~20% will be channeled towards general working capital. We believe the management is building up its war chest ahead of an earnings accretive project.

Gearing ratio reduced to 0.24x, comfortable financial position – In our view, the share placement exercise reduces the Group’s gearing ratio to 0.24x immediately after the share placement, from 0.65x based on 1Q09 balance sheet. If Ezion were to finance the acquisition of offshore and marine assets through bank borrowings, assuming 80% of S$43.4m gross proceeds raised, gearing ratio would have risen to 0.92x instead. At gearing ratio of 0.24x, we believe Ezion would be in a better financial position to obtain bank financing in the future.

Maintain BUY; Target price of S$0.94 – We are keeping our earnings forecast at this juncture. While earnings per share are expected to be diluted to 8.5 Sg cts as a result of the share placement, we are maintaining our target price of S$0.94, implying a forward PE of 11x FY10F EPS (previously 10x FY10F EPS), in anticipation of earnings accretive projects from the acquisition of offshore and marine assets mentioned in the share placement announcement. With an upside potential of 38%, we maintain our BUY recommendation on Ezion.

Swiber Holdings: Not out of the woods yet

Unexpected profits in 1Q09. Swiber's headline net profit was S$9.8m (-5% y-o-y) in 1Q09, despite a 23% y-o-y increase in revenue. We estimate that its recurring net profit has dropped 34% y-o-y to about S$6.8m; if the net gains from sale of vessels under sales-and-leaseback agreements and other assets were excluded. Still, this is better than our expectation of a slight loss in 1Q09.

Net gearing has come down, as expected. Swiber's net gearing has come down to 0.94x as of end 1Q09, vs. 1.01x in 4Q08. As Swiber took delivery of more vessels under sales-and-leaseback agreements in 2009, we project the net gearing to reduce further to 0.5x by end 2009. However, all bets are off the table if the scheduled delivery of these vessels is again postponed.

Concern on the lack of new orders. Swiber's net order book as of end 1Q09 was US$515m, vs. US$596m as of end 2008. This implies that Swiber has not won any small offshore EPCIC contracts y-t-d in 2009. The 2009 work season in Southeast Asia has already started, and Swiber has to rely mostly on the award of contracts for new markets in South Asia/Middle East to boost its order book.

Raise fair value to S$0.69. We have cut our new order win assumptions for 2009 and 2010, and reduced our recurring FY10 net profit estimate by 5.0% to US$30.7m. Still, we upgrade fair value to S$0.69, due to: 1) The use of higher 7x normalized FY09 PE, and 2) The increase in our FY09 net profit estimate to US$28.6m, vs. US$17.6m previously, due to the unexpected profits in 1Q09. Maintain SELL, given the lack of price catalysts.

ASL Marine – 3Q09 results

ASL Marine announced 3Q09 net earnings of S$23.4m, up 65% versus 3Q08. YTD, it reported a 51% boost in net earnings to S$63.6m. However, these numbers included a gain of S$12.2m million from the disposal of ASL Energy. Excluding the gain, net profit was S$11.2m for 3Q09, down 21%, and was slightly below our expectation.

Revenue for the Group grew by 17% YTD to S$333.2m through higher revenue from all three business segments. The revenue growth was attributable to progressive recognition of higher value shipbuilding projects undertaken, an increased number of shiprepair jobs and higher shipchartering revenue due to increased fleet size and a higher proportion of time charters.

Gross profit increased by 11% to S$58.9m, but gross margin decreased marginally from 18.7% to 17.7% due to higher cost provisions on certain shipbuilding projects lower margins in shiprepair. We are raising our net profit forecast by 7% to S$77.4m, to factor in the higher than expected gain from the disposal of ASL Energy, but lowering our operational earnings forecast, due to lower margins, particularly on shiprepair.

ASL has seen its share price almost double in the recent market rally from extremely oversold levels. Despite this, ASL is still trading at extremely attractive valuations of 3.4x FY09 earnings (YE June), and 5.8x on core net earnings (excluding disposal gains). We maintain our Buy recommendation, to our target price of S$1.62, or just 7x PER.

SembCorp Industries - Valuation attractive, offshore catalyst

SCI’s share of profits from Sembcorp Marine (SMM) rose S$18m on order book recognition. This more than offset a S$10m fall in utilities net profits. Utilities was broadly in line with expectations: the unit’s Singapore operations recorded an unexpected S$4.6m gain on sale of strategic fuel and S$5.7m deferred tax writeback, but these gains were offset by provisions which we estimate at about S$5m, made for an unscheduled plant maintenance in May.

We recently raised SMM order book assumptions by 17-80% as we expect contract awards to pick up in the coming months and we think the positive momentum could be sustained if global macro data continues to surprise positively. This could be a powerful share price driver for SMM, and in turn, SCI. Contracts: SMM has just announced a S$230m contract for an offshore gas platform and we believe a semisub completion job worth about US$250m is imminent.

Implied valuation of 6.2x 2010E EV/EBITDA on the core utilities business looks attractive, given the division’s relatively stable earnings outlook. An SMM share price rally is meaningful to SCI as SMM accounts for 46% of SCI’s valuation. Valuation: Sum of parts based price target raised to S$4.04 from S$3.25 The increase is due to higher market values of Sembcorp Marine and Gallant Venture. SCI’s utilities business is valued on DCF.

Otto Marine - there is no order cancellation

OM reported 22% yoy drop in 1Q09 PATMI of S$6.5m. This is mainly due to net foreign exchange loss of $2.0m as compared to an income of S$3.9m in 1Q08 and 78.7% decrease in share of profits of associates.

Gross profit (GP) rose 10% yoy to S$15.0m, mainly due to an increase in shipbuilding business, partially offset by decrease in GP from chartering and ship repair & conversion business. Overall, the Group's GP margin was down from 23.8% to 20.9% due to decrease in GP margin of chartering business from 86.4% to 49.7%. The GP margins for shipbuilding and repair & conversion rose from 15.1% to 17.6% and from 62.3% to 75.9%, respectively.

OM's order book stands at S$752 million as of 31 March 2009, comprising 19 vessels which includes 12 AHTS (Anchor Handling Tugs Supply) vessels, 4 PSVs (Platform Supply Vessel), 1 utility vessel, 1 offshore construction vessel and 1 work barge with accommodation for 300 people.

Cash deposits of 20-30% have been received. Ytd, there is no order cancellation. OM expects to grow its chartering business on the back of growth in own charter fleet from 12 in 2008 to 21 in 2009 and from 1 in 2008 to 10 in 2009 for its JV charter fleet.

OM expects constant or lower income from ship repair & conversion segment as the Group's focus has shifted to shipbuilding. OM is currently trading at 7.0x PE and 2.2x PB. As of 31 Mar 09, OM has a net gearing 0.7x.

SembCorp Marine sells PetroRig I semi-submersible rig to Diamond Offshore

SembCorp Marine (SMM) says its subsidiary Jurong Shipyard has accepted the bid by Diamond Offshore Services Company, a related company of Diamond Offshore Drilling Inc to purchase the PetroRig I semi-submersible rig . The sale is expected to be completed by end-June.

SMM has not disclosed the purchase price, but we think it should be higher than the last offer price of US$450m made by an international drilling contractor to PetroRig I Pte Ltd in Mar 09.

The sale proceeds should cover the unpaid sum (50% of US$423m shipyard contract) due to Jurong Shipyard.

Swiber Holdings: Bolsters its balance sheet, Sell

Swiber successfully completed new share placement. Swiber has raised net proceeds of S$71.8m from its placement of 84m new shares last Friday, representing about 19.9% of its previous issued capital. The new share placement is priced at S$0.88 per share, and is sold to institutional investors. Swiber would utilize the net proceeds for general working capital purposes.

Swiber may be in a net cash position by end 2009. The net cash proceeds from new share placement would greatly improve Swiber's balance sheet, vs. 0.94x net debt as of end 1Q09. As Swiber takes delivery of vessels under sales-and-leaseback agreements, we expect the group to be in a net cash position by end 2009.

Two critical months for new orders. Swiber's order win season is now reliant on the award of contracts for relatively new markets in South Asia/Middle East, especially in June/July. The international/national oil companies have been asking for 20-40% dip in supply chain cost, which to-date, has not happened. While higher oil prices are of help, the new orders flow would still be uncertain, given the still high offshore EPCIC costs and unfavorable credit terms. Note that Swiber's net order book as of end 1Q09 was US$515m, while its order pipeline is unchanged q-o-q at about S$5b.

Maintain SELL. Our lowered fair value for Swiber is S$0.60, due to negative share dilution impact, and using 7x FY09 PE. Maintain SELL, due to low earnings visibility.

Shipping Trusts: Concerns easing selectively

First Ship Lease Trust : Provides leasing services on a long term bareboat charter basis to the international shipping industry. Currently owns a fleet of 23 vesse

Pacific Shipping Trust : Shipping Trust with a portfolio of 10 container vessels on charter to sponsor PIL and CSAV

Rickmers Maritime : Business trust fund to own and operate containerships under long term, fixed rate charters to container liner shipping companies

Liner companies looking to push rate hikes. Most of the leading container carriers, including Maersk and NOL are now looking to arrest the free fall in container freight rates through coordinated rate increases. While the problem of lower trade volumes, idle capacity and a huge orderbook will still need some solving, we may be seeing some stability in rates for the rest of 2009. This, combined with the improving sentiment about a global economic recovery in 2H09, should spur renewed confidence in container shipping stocks, and consequently, shipping trusts.

Visibility improving bit by bit. FSLT has a more diversified fleet than peers – with about 38% exposure to containers and 65% to tankers (oil, chemical, product). With the oil price in recovery mode, counterparty risk may be reduced. Moreover, FSLT has no big refinancing risks before 2012. Elsewhere, with the US$360m lifeline thrown to CSAV by German owners last week, PST’s fortunes may be looking up as well. However, RMT has to contend with unfunded capital commitments and an upcoming bullet loan repayment in FY10 and the picture still looks hazy.

FSLT is our top pick, upgrade to BUY. Given the healthy response to the 1Q09 dividend re-investment scheme, investors seem to be giving the thumbs up to FSLT’s attempt to align the interests of both short-term and long-term investors. As such, given the lack of near-term concerns, we believe there is better visibility to FSLT’s dividend payouts, despite trading at much higher yields of about 25%. Hence, we upgrade the stock to BUY, and our DDM-based TP is revised up to S$0.71.

Upgrade PST to HOLD. We are also upgrading our call on PST to HOLD with a revised TP of US$0.20, given that the worst that can happen now on its CSAV charters is a 35% rate cut. Elsewhere, we maintain our HOLD rating on RMT with a revised DDM-based TP of S$0.50.

Increase in borrowing costs on Rickmers Maritime's Loan

Rickmers Maritime (RMT) announced one of its nine banks has invoke the market disruption clause in one of its loans. As such, an additional interest amount of US$37,500 will be levied.

The additional interest payment has no significant impact to our earnings forecas

We forecast 20.9% and 20.4% DPU yield for 2009 and 2010 respectively.

Maintain HOLD in view of the unfunded US$700m capex due in 2010 and risk of falling asset prices that may breach LTV covenant.

KS Energy Services Ltd: Rights issue of warrants

Rights issue of warrants. KS Energy Services Ltd (KS Energy) has proposed to undertake a renounceable non-underwritten rights issue of up to 92.747m warrants at an issue price of S$0.20 for each warrant. Each warrant carries the right to subscribe for one new ordinary share at an exercise price of S$1.40 on the basis of one warrant for every four existing ordinary shares held by entitled shareholders, fractional entitlements disregarded. Several key shareholders have given their irrevocable undertakings to subscribe for the entitlements.

Previous agreements. The group has previously entered into a subscription agreement (dated 6 Jun 07) with Sovereign Assets S.A pursuant to which warrants were issued; the full exercise will amount to an issuance of 9m shares (subscription shares). There are also three bond purchase agreements (dated 23 Jul 07) with Centar Investments (Asia) Ltd, Stark Asia Master Fund Ltd and Stark Master Fund Ltd pursuant to which convertible bonds were issued; the full conversion will result in an issuance of about 25.3m new shares (conversion shares).

Proceeds for general working capital. Including the subscription shares and conversion shares, 92.747m warrants will be issued, assuming full subscription and exercise of the current warrants issue (maximum subscription scenario). This will raise about S$18.2m in net proceeds from the warrants issue. A minimum subscription scenario outlined by the group delineates that about 84.2m warrants will be issued, and the estimated net proceeds will be about S$16.48m. KS Energy intends to use the net proceeds for general working capital.

Maintain HOLD. Although the upfront estimated net proceeds does not seem very substantial compared to the group's cash level (about S$70.6m as at 31 Mar 09), proceeds from the exercise of warrants are considerable (about S$118m assuming full exercise and minimum subscription scenario). This will provide additional financial flexibility to the group (as of 31 Mar 09, ST debt: S$145.9m, LT debt: S$200m, net debt-to-equity ratio: 0.69x). Together with Dubai-based Dutco, the group may also look into acquiring assets during this downturn. We are raising our fair value estimate to S$1.36 (prev S$1.10) based on 9x FY09F PER for the distribution business and 10x peg for drilling and related businesses due to the current re-rating of the sector, but maintaining our rating at HOLD.

Swiber Holdings: Concerns of financing and a declining orderbook still present

1Q09 results review. Swiber Holdings (Swiber)’s 1Q09 revenue grew 23% YoY to US$87.1m on the back of increased activities in the offshore construction projects in Malaysia, Brunei, Indonesia and India, but declined 15% QoQ. This flowed down to net profit of US$11.9m, which saw an increase of 15% YoY (and a turn-around from 4Q08). Adjusting for gain on disposal of assets of US$3.5m, core operating profit was US$11.6 (above our estimates of US$9m). Operating profit margin of 13.3% was a reversal from 4Q08’s margin of -16.7%, but a decline of 5ppt on a YoY comparison. This was also better than our expectation of 9%.

Nonetheless, financing is still our key concern. Swiber’s net debt to equity ratio stood at 0.94x as at 31 Mar 09 due to debt repayments and sale-and-leaseback arrangements. Going forward, financing is still our key concern. We note that the repayment of Swiber’s non-current bonds would be due in 3Q10 (US$71.2m) and due in 1Q11 (US$72m).

Declining orderbook is another worry. Swiber has an orderbook of US$515m as at 31 Mar 09 as compared to US$596m as at 31 Dec 08.

Target price under review. Maintain SELL. Over the past month, Swiber’s share price (+76%) has outperformed the STI (+12%) and its peers (+53%). We are currently evaluating our estimates, pending a talk with the management. Our target price is currently under review. We continue to be cautious on this counter, especially on financing concerns and weakness in earnings quality. Maintain SELL.

Keppel Corp: Skeie Drilling and Production may face difficulties in paying for its three jackup rigs under construction

Skeie Drilling and Production may face difficulties in paying for its three jackup rigs under construction

1) Skeie Drilling & Production (SKDP) may seek company liquidation if no agreement with its bondholders were reached by 4 June 2009.

According to SKDP yesterday, there was to-date no agreement with a group of its secured bondholders on its financial and rig construction re-structuring proposal. Further negotiations have not been fruitful, with the bondholders' counter proposals rejected.

As a recap, SKDP's re-structuring proposal (initiated on 17 April 2009) has expired on 31 May 2009, including the possibility of extending the delivery schedule for rig construction contracts with Keppel Corp (KEP), and the underwritting commitment from SKDP's main shareholder, Skeie Technology and Wideluck, for possible US$85m equity fund raising.

2) SKDP is now behind its progressive payment schedule for Rig 1 (with US$37m milestone payment due on 31 May), and may miss the US$40m payment for Rig 3 on 4 June.

For Rig 2, SKDP's inability to raise US$18m of new equity by end May implies a breach under the Prodjack 1 bond loan agreement, as the jackup rig is still without a charter contract. Collectively, SKDP may also risk the termination of US$675m in bank loan commitment to finance the three rig construction with KEP, if the contractual breaches for these projects are not resolved.

3) SKDP's Board of Directors now believes SKDP is insolvent, and could be illiquid if no re-structuring agreement could be reached.

As a last step to avoid its filing for bankruptcy, SKDP's Board of Directors will now seek "irrevocable pre-acceptances from a qualifying majority (2/3) of the three SKDP secured bond loans and the convertible loan to the proposal as set out in the SKDP announcement dated April 17 and as described in the SKDP Company Presentation dated April 17 posted on the company's web-page www.skeiedrilling.com".

If these conditions can be met by 4 June 2009, and pending a follow-up formal votes from all bondholders, SKDP will then seek extensions to the agreements with its main shareholder and KEP as per the re-structuring proposal on 17 April.

4) SKDP is one of KEP’s top 3 customers.

SKDP currently has construction contracts for three N-Class Jackup offshore drilling rigs with Keppel FELS shipyard in Singapore. We estimate that the contracted value for the three orders were S$1.7b, with an estimated S$0.8-1.0b worth of contracts yet to be recognised (or 8-11% of KEP's current order book).

While there is a lack of information on the actual cash collected to-date by KEP for these three SKDP orders, we believe that the possibility for KEP to complete construction of the three rigs on its own is not high in the event of a default by SKDP, unless the total cash collected to-date is more than 50% of combined contract value. Maintain FULLY VALUED on KEP. Our fair value for KEP stays at S$5.13.

Jaya Holdings: A better than expected performance

3Q09 results ahead of expectations. Jaya reported 3Q09 net profit of S$22.2m (-43% y-o-y), which included a net forex loss of S$13.4m. Excluding this, recurring net profit would be S$35.6m (+35% y-o-y), above expectations. Group revenue of S$70.1m (-9% y-o-y, +86% q-o-q) improved significantly q-o-q as the shipbuilding division saw a higher rate of revenue recognition on vessels under construction, but was offset slightly by lower contributions from the chartering division which reported a reduced fleet size, but higher day charter rates of S$11,378 (+36% y-o-y). Jaya also posted markedly reduced admin costs of S$0.2m, down 91% y-o-y, which partially buoyed operating margins of 55.8% (+12.6ppt y-o-y). In-linewith its newbuild program, net gearing edged up marginally to 0.66x, from 0.65x as of end 2008.

Adjusting FY09 net profit estimate to S$75.4m, to account for higher thanexpected shipbuilding revenue, improved gross margins and lower operating costs. No change to our FY10 numbers.

Upgrade to HOLD, TP S$0.54. We are raising Jaya's fair value to S$0.54, based on 1.0x FY09F P/BV (prev 0.45x) as we adjust for lower equity risk premium. We are encouraged by Jaya's ability to manage its operating costs well, and its ability to dispose vessels despite the persistent challenging macro conditions. In 9MFY09, the group has received disposal proceeds of c. S$142m which will help towards reducing balance sheet strain. Forex and translation losses should also start to taper off as we understand that the majority of the hedges contracted previously have matured. Hence, we upgrade Jaya to HOLD from Fully Valued.

Ezra Holdings Luncheon Presentation

Going forward, Ezra is looking to grow the company by relying partially on services instead solely on CAPEX. Currently, Ezra has a CAPEX commitment is US$350m.

Net gearing is expected to be less than 1.0x. Ezra has about 15-20 main customers. Shell contributes 30-40% of total revenue. Weighted average charter contract tenor is about 3-3.5 years.

Recently cancelled two MFSVs with KMS and looking to cancell one MFSV contract with Keppel. The contract has not begun construction work. Ezra has paid S$3.4m deposit and contract is still under negetiation.

Ezra has loan-to-value covenants of 70-80%. The management guided that they are not in breach of any loan covenants. Before the crisis, cost of borrowing was LIBOR + 80-125 bps. For the newer contracts, current cost of borrowing has gone up to LIBOR +220 bps.

Average time charter rate for an AHTS is about US$1.95-2 per bhp (FY08: US$1.80-1.85 per bhp). Rates are softening for smaller AHTS vessels in shallow water but not so much for those operate in the deepwater.

Based on consensus forecasts, Ezra is trading at 6.4x 2010 P/E (8.1x 2009 PE) and 1.1x 2010 P/B (1.2x 2009 P/B). As of 28 Feb 09, Ezra has a net gearing of 47%.

ASL Marine Holdings: Good results, but weaker operationally

ASL reported a strong set of results, with 3Q09 headline net profit of S$23.4m (+65% y-o-y, +44% q-o-q) coming in above our expectations, on revenue of S$106.9m (+27% y-o-y, -1% q-o-q). This was mainly due to a larger than expected gain from the divestment of its stake in ASL Energy earlier this year, and an additional S$0.4m vessel disposal gain. However, operating profit of S$11.9m was weaker than expected, mainly due to: 1) weaker gross margins (-11.5ppt y-o-y) on the ship repair business from lower volume of jobs undertaken in the period; and 2) a relatively large S$2.3m provision made for doubtful debts. Stripping out exceptionals, we estimate recurring income to be c. S$11m, down 15% y-o-y. Balance sheet remains strong with net gearing of 0.17x, expected to dip to 0.14x by end FY09.

We adjust our FY09 earnings estimate upwards slightly by 1% to S$72.9m to factor in the larger than expected disposal gains, but maintain our FY10/11 numbers. Going forward, we expect decline in shipbuilding contributions to be somewhat mitigated by greater contributions from the higher margin ship repair division, which is expected to ramp up on the back of an enlarged capacity, scheduled to come on stream over 2H2009.

Downgrade to HOLD, with TP maintained at S$0.94. While we still like ASL for its diversified revenue stream and strong balance sheet, the counter has run up 29% since we raised its fair value last week, leaving an upside of c. 6%. Hence, we downgrade ASL to HOLD (prev Buy).