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.

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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.

BH Global Marine - Gross margin growth QoQ

Revenue decreased 4.4% to S$26.1m in 2Q09 ? In line with expectations ? mainly due to the fall in ASP in marine cables and accessories as a result of lower copper price and stronger USD.

Gross profit margin grew 2.1ppt QoQ to 35.8% in 2Q09 - The Group's gross profit decreased 9.2% to $9.3m in 2Q09, due to lower product ASP, consolidation of the Group's new marine switchboards and services segment which carries a lower GPM, resulting in 1.9% YoY decrease in GPM to 35.8% in 2Q09. However, on a more positive note, GPM actually grew 2.1ppt in 2Q09 on a QoQ comparison.

Earnings revision ? We maintain our revenue forecast for FY09~10F but lift our GPM assumptions by 4.4~3.5ppt to 36.5~37.4% respectively as we expect BH Global to continue to experience margin expansion in 2H09F given that the Group has utilized a large proportion of its higher cost based inventory in 2Q09, built up prior to the collapse in copper prices in 3Q08. As such, we raise our net profit forecast by 17.4~11.4% to S$16.8~18.1m for FY09~10F respectively.

Upgrade to BUY; TP increased to S$0.30 ? We raise our TP to S$0.30 after switching to P/E valuation metrics as we expect the Group's earning to register growth from 3Q09F onwards. We look beyond FY09F's financials and value BH Global at 7x FY10F P/E, BH Global's median P/E for FY05 to FY08, deriving our TP of S$0.30. Key risk to the stock - Debt collections issue where AR turnover days increased to 125 days at 1H09 vs 92 days at FY08.

Cosco - Challenging years ahead

In a recent meeting with management, it was highlighted that the average revenue per vessel repaired has declined by 30-35% y-y because shipping companies are cutting back on repairs and servicing. As at 1Q09, close to 60% of repairs at the group’s six shipyards was for bulk carriers, while 15-18% was for container ships, and the rest for chemical and other tankers and specialised vessels. Management is of the view that a sustained improvement in Baltic Dry Index (BDI) levels will lead to increased ship repair revenue per vessel, particularly for bulk ships, which account for most of the vessels repaired at its six key shipyards.

As for the progress of its US$7bn shipbuilding orderbook, the group delivered its first bulk ship (57,000 dwt), the MV APG KV, to its owner on 28 April, 2009 from the COSCO Guangdong yard, according to management. This came almost two years after the group announced its first bulk carrier newbuild contract on 11 July, 2007. To date, shipbuilding contracts account for US$4.5bn, offshore for US$2bn and conversion for US$0.5bn of the group’s gross orderbook of US$7bn.

Since December last year, the group has reported five of its bulk ship orders cancelled and another 26 rescheduled from six months to three years. Management is of the view that there could be more delivery rescheduling since ship owners are still requesting the postponement of ship deliveries.

Management expects revenue from its 12 remaining bulk ships to be adversely affected by weak bulk charter rates, once a number of vessels come up for renewal at today’s lower prices. An estimated 35% y-y decline in revenue is likely, according to management, with three to four of its ships making losses on short voyage charters.

In FY08, group turnover from shipping rose by 24% y-y to S$257.4mn, while shipbuilding EBIT increased by 26% y-y to S$174mn, accounting for 38% of the group’s total EBIT. However, with more than half of its ships up for charter renewal in 1H09F, the group will be hard put to shore up earnings, given the significantly lower freight rates relative to previous charters.

Cosco’s 1Q09 net profit of S$33.2mn was below our estimate of S$46mn, based on lower ship repair, shipbuilding and shipping earnings. The group sales were flat at S$714mn, against our estimate of S$865mn, with ship repair accounting for 20% of revenue, conversion and offshore for 51% and newbuildings for 29%. The group’s 1Q09 EBIT declined by 59% y-y to S$61.8mn, below our estimate of S$85mn, with EBIT margin contracting by 12.2pp y-y to 8.7% (no divisional EBIT breakdown given).

Management highlighted that while ship repair continued to be profitable, the number of ships repaired for the quarter was down by 60% y-y, which means just 24 ships were repaired, according to our estimates from 1Q08 numbers (no detailed numbers given for 1Q09). Ship repair revenue stood at S$173mn for the quarter, with bulk ships forming 59% and containerships 18% of total vessels repaired.

Shipping revenue fell by 22% y-y to S$46.2mn, based on lower charter hire rates, but with EBIT margin remaining at 40%, shipping contributed an estimated S$18.5mn or for 30% of group EBIT, based on our estimates.

With continued execution delays, shipbuilding barely broke even in the quarter, according to management. In FY08, the group made S$171mn in provisions, mostly in 4Q08, with some S$89mn for ongoing construction contracts. These included provisions for steel prices, higher ancillary outsourcing and contracting costs, tighter pre-delivery inspection procedures imposed by shipowners facing the current unfavourable market conditions and higher operational and development costs for shipyards expansion.

We have revised our FY09-10F earnings forecasts downward by 25-35% to account for lower margins for the group’s shipyard business. We have lowered FY09F and FY10F EBIT margin to 9.0% and 9.1%, from 15.2% and 15.3%, respectively (versus 1Q09 EBIT margin of 8.7%).

With the earnings revisions, our SOTP price target for Cosco Corp (method unchanged) stands at S$0.70 (previously S$0.63). The marginal increase is mainly on an update in the market valuation of the group’s fleet of 12 ships (from US$23mn/vessel previously to US$28mn, based on DryShip’s recent sale of a 1995 Panamax drybulk carrier for US$30.8mn). Our shipyard valuation remains DCF-based, with a 12% WACC.

KS ENERGY - Rights to commence trading - Impt Date

(I) Rights to commence trading : 15 July 2009

(II) Last date for trading of Rights in the Ready and Unit Share Markets : 23 July 2009

(III) Last date and time for acceptance, renunciation, excess application and payment : 29 July 2009 (ATM: at 9.30 p.m.) (Form: at 5.00 p.m.)

(IV) Rights to cease trading in the Buying-In Market : 30 July 2009

Cosco - Expect more cancellations after eight from China Cosco

Cosco Corp Singapore (COS) announced the cancellation of eight contracts worth US$299m and the delay of another three vessels. The cancellations were anticipated and are priced in. Cumulative cancellations account for 9% of order backlog and delays account for a further 19%. However, there is little balance sheet risk. Expect further cancellations and/or delays. As such, we maintain our SELL recommendation.

Order cancellations continue. The cancellations were made on a mutual agreement between COS (COS SP - S$1.16 - SELL) and China Cosco (1919 HK - HK$9.53 - SELL), a subsidiary of the Cosco Group, which is COS’ parent company. We had anticipated that these contracts might be cancelled given the significant delivery delays to date and the low demand for those vessels. Note that China Cosco accounts for c. 29% of total order wins; therefore, further cancellations from the company are likely.

Limited impact. The cancellations do not affect our earnings estimates as we have factored in 25% cancellations. However, it does affect our estimate of the cash balance as we would have expected COS to retain the estimated S$87m in deposits paid in relation to these orders. However, with a cash balance of S$1.8bn, the refund will not have a significant impact on the health of the company’s balance sheet and COS is still in a net cash position. Maintain SELL.

Pacific Shipping Trust: No respite yet

Container market continues to struggle. A new Drewry Shipping Consultants' report projects a 10.3% market contraction in global box traffic over 2009, and a small 1% growth next year. It estimates that 27m fewer TEUs will be handled for the year than in 2007. Drewry also says "continued unsustainable freight rates" are pushing smaller companies to the brink of financial collapse. The head of Maersk Line said in an interview last week that growth in shipping volumes in 2010 is unlikely - he expects capacity utilization in the industry to fall further over the next 12 months . July is a key month as some major liners implement widely publicized rate increases. Trans-Pacific carriers have also proposed rate hikes starting August to bring freight rates back to 'compensatory levels'. It remains to be seen if these increases take hold in the broader market.

CSAV uncertainties remain. Pacific Shipping Trust (PST)'s negotiations with its charterer, CSAV, have yet to be formally resolved. CSAV won concessions from other ship-owners in late May. According to Lloyd's List, charter rates for 85 vessels will be cut by 36% for two years with the owners accepting half of the cash equivalent of the rate reduction in terms of shares in CSAV. It is unclear whether a renegotiation with PST, which has two vessels chartered out to CSAV, would parallel this deal or take another shape entirely. CSAV has also raised US$145m in new equity with the sale of more than 300m new shares in the company. Counterparty risk of default (on CSAV) has certainly moderated and we are more sanguine about how negotiations play out. Nonetheless, the devil is in the details and there is no guarantee that the ultimate deal will be equally favorable to both sides. The reaction of PST's lenders to any concessions granted is also an unknown.

Valuation. PST faces uncertainty on two fronts - the CSAV renegotiation and a sickly container industry. Industry concerns are a deeper and likely more protracted overhang on PST in our opinion. Current price levels present deep value but with little evidence of an imminent industry turnaround, we think it is presumptuous to turn buyers. We bump our fair value estimate up to US$0.24 from US$0.16 to reflect moderated risks on the renegotiation. This represents a 30% discount to our 'normal' case discounted FCFE value of S$0.34 (10% discount rate). Our estimates (which assume a 30% cut in charter rates to CSAV) are unchanged. Maintain HOLD.

Ezra - Defining the next growth phase

Subsea to be the next growth pillar: Ezra announced its expansion plans for the next few years with the establishment of the Subsea division, which will encompass the existing Energy division. The division will comprise 3 assets - a heavy lift well intervention subsea construction vessel (via EOC) and 2 multi-function support vessels, which are already under its US$350 million capex plan for 2008-2011.

A post-2010 story for now: The vessels will only all be delivered by 2H CY2010 so any meaningful earnings contribution should come after that. The vessels are not contracted out yet, as management is also cautious of potential delays at the shipyards and the possibility of securing higher charter rates next year. The division is expected to contribute about 30-40% of group revenue, based on our estimates.

Scope of work in the subsea space: Ezra will focus on its core expertise as an integrated offshore services provider with its venture into the subsea business geared towards the following aspects: (i) subsea construction support, (ii) system installation, (iii) production maintenance, and (iv) decommissioning. According to the World Deepwater Market Report by Douglas Westwood, subsea spending is expected to exceed US$80 billion for 2009-2013. Management noted that a typical subsea services contract could last from 2 to 5 years with charter rates per vessel ranging from US$150,000 – US$300,000/day depending on the type of work involved. This translates to US$5-10/BHP on a 30,000BHP vessel, based on our estimates, which is significantly higher than the US$2/BHP blended average for the existing AHTS fleet.

Earnings and valuation neutral for now: We have not factored in the contribution of the 3 vessels in the Subsea division into our earnings estimates and valuation as the risk remains over whether Ezra will be able to contract out the vessels and at the charter rates guided. Hence there could be potential upside to our earnings estimates for FY2011.

Stayed focused on execution: For now, there is also a lack of operating track record in this segment so it remains to be seen how the company may penetrate the market, although Ezra’s position as an integrated service provider does position it favorably to secure subsea-related contracts from the oil and gas majors. Upside catalyst for the stock would come from a successful contracting out of the vessels at a dayrate equivalent to US$5-10/BHP.

SembCorp Marine - Price target maintained at $3.22

Our price target is S$3.22 based on our sum-of-the-parts (SOTP) valuation comprising a DCF valuation (over a 20-year period and incorporating a cyclical downturn in earnings from FY11) of the group’s shipyard businesses, which includes the three Singapore yards, as well as earnings from overseas yards including Cosco Shipyard Group, and its remaining 5% stake in Cosco Corp. Our WACC assumptions remain unchanged at 7.5% and zero terminal growth.

With FY09/10E P/E of 12.3x and 12.1x, SMM still trades at the lower end of its historical P/E band of 7x and 28x. FY09/10F ROEs of above 31.6% and 26.8% are creditable for a shipyard group, in our view, and we expect dividends to be maintained for FY09F and FY10F, giving dividend yields of 4% which as attractive relative to peers.

SMM holds net cash of S$1.8bn as at March 2009, of which S$1.2bn are WIP payments, with steady cashflow seen from progressive recognition from its S$9bn order-book. Given that capex requirements can be met from its operating cashflow, we believe the group is unlikely to need to raise capital in the short to medium term Risks to price target: Our price target could be negatively affected by extensive cancellations of the group's O&M orderbook, or by significant losses incurred on these O&M projects, or more associate losses.

Sensitivity analysis. If we assume a 10% cancellation of the group’s offshore rig contracts from its current orderbook, our FY09/10/11 earnings estimate will fall by 8.3%, 7.2% and 6.8%, respectively. Our current earnings forecast already takes into account all announced cancellations and delivery postponements.

Rowan impact on Keppel

Rowan had previously placed newbuild orders for four Super 116E class Jackup rigs (EXL #1 to EXL #4) with KepCorp. KepCorp is proceeding with the construction of the first three jackups for Rowan with no change in schedule. The last rig continues to have a suspension of construction based on goodwill rendered by KepCorp to Rowan. KepCorp will resume the building of the forth rig in 3Q2009 (unless Rowan officially cancels the construction and pays penalties. Rowan's decision will likely be made during 3Q09 results). At this point in time, we have indications from KepCorp that they "think" Rowan will be resuming the construction.

Rowan has revealed in their investor communications that they are committing about US$273m for the rigs being built at Keppel for 2009. As we know it, all three Jackups have no contracts on hand. While this is a concern, Rowan has a significant number of assets (22 offshore jackups and 30 land rigs) that are operating and generating cash flows.

While 2009 might still show good performance in view of its previous year orderbooks, KepCorp has not won any newbuild contracts for its Offshore division for about 1 year. From our recent visit to KepCorp, management expects the gap to affect its 2010 earnings substantially.

We have a HOLD rating on KepCorp with a fair value of S$6.40. Entry at about S$6.10-6.20 can be explored if your clients are long term investors.

Keppel Corporation - Petrobras to bid out US$4 billion worth hull contracts by July-end; Keppel in the running

Petrobras to bid out US$4billion worth of hull contracts by July- end: Keppel Corp along with 4 other companies (namely Atlantico Sul, 10% Samsung owned, Engevix Engenharia SA and UTC Engenharia SA) are intending to bid for US$4 billion worth of Petrobras contracts to build hulls of FPSOs to be used in Brazil’s pre-salt oil fields (source: Bloomberg). The news article further adds that the companies are likely to submit the proposals between July 17 and July 24 and Petrobras is likely to open the offers on July 31. Petrobras aims to start operating the vessels in 2015 and 2016.

Potentially add S$4.2-6 billion to Keppel Corp’s new contracts versus JPM’s estimate of S$1 billion for FY09E: Assuming Keppel Corp successfully bids for these projects and takes a 70-100% stake within the order (70% is arrived at assuming Keppel successfully bids for Rio Grande wherein news reports (source: Upstream) suggest a 70% stake for KEP) it would add S$4.2-6 billion to the orderbook. Moreover assuming a 7-8% EBIT margin given its a hull contract (this may however be on the higher side for initial contracts given historic performance of ‘new projects’ by Keppel in Brazil), this would potentially add 11-12% to our FY10E / 11E EPS estimates and possibly S$0.30 / share (assuming a 2x on profit contribution). Do note however that our estimates already assume S$0.83 / share Petrobras option value (although this has been assigned only for new rig orders).

Still await news on Rio Grande shipyard purchase; would push Keppel Corp in to lead position for these orders: Given that Rio Grande shipyard has been identified for the assembly work of 8 hulls for the FPSOs, we believe Keppel Corp would be in a ‘leading’ position for the bids of these hulls for FPSOs in case it eventually does take the 70% stake in Rio Grande.

Ezra Holdings - 3Q09 results: Positive earnings momentum

Results in line, resilient dayrates: 3Q09 net profit of US$18.8MM (+8% Y/Y) was in line with our expectations, bringing 9M09 earnings to US$43MM (+33% Y/Y, excluding EOC divestment gains). Blended dayrates continue to stay firm at about US$2/BHP, and we note that 4-5 vessels are due for charter renewal in 2010, providing potential upside for FY10E earnings should they achieve higher charter rates.

Updates at EOC: FPSO Lewek Arunothai is under commissioning and is expected to make significant contribution by 4Q09 (next quarter). On the other hand, we have also highlighted in our Alert dated 17 April 2009 that its other FPSO project might not materialize. According to an Upstream article on 11 June 2009, the deal with Premier had indeed fallen through as EOC was unable to secure the US$400MM funding for the conversion of the FPSO.

Cash flow and gearing: Ezra’s operating cash flow remains negative at –US$42MM due to the change in sales mix. Collection at the Marine Services division is based on milestones and collection period of the Energy division tends to be longer than the other divisions. Gearing is about 43%. However, this excludes the S$92.4MM (~US$63MM) raised from the recent 78MM shares placement. Factoring that in, gearing will decrease to a more comfortable 29%, based on our estimates.

Maintain Neutral, raise Jun-2010 PT to S$1: We removed the previously assumed 20% collapse in terminal year free cash flow in our valuation of the offshore chartering business given the resilient dayrates enjoyed by Ezra’s young fleet (average: 3 years). Potential upside risk to earnings could come from better-than-expected charter rates for the 2 multi-function support vessels due to be delivered by 1H 2010, which have yet to be contracted.

CSE Global: Orders flowing regularly

Significant order wins from the Middle East. CSE Global announced that it recently won four contracts worth a total of S$45m in Saudi Arabia and the United Arab Emirates. As CSE announces only bigger order wins of >S$10m, we believe that the company is on track to secure S$100m new orders each quarter. In 1Q09, CSE secured S$160m worth of new orders, buoyed by the S$58m healthcare win. We maintain our assumption of S$400m non-healthcare order wins for FY09F.

Sound operating cash flow is the key. CSE is expected to generate c.S$12m operating cash every quarter as more payment milestones are reached in 2Q/3Q 09. We estimate S$40m operating cash flow (similar to FY07 level) and only S$3m capex in FY09F. CSE could pay back S$22m of debt to reduce its net gearing to 50%. This leaves S$15m; enough for meeting our forecast dividend of S$13m (DPS of 2.7 Scents), translating to 5.5% yield. Additionally, CSE is expected to convert the majority of its short-term debt (c.S$117m) to a 3-year term loan, providing flexibility in its cash management.

Attractive 35% upside. Our target price of S$0.66 is pegged at 7.5x FY09F PER, attractive compared to the average valuation of 8x PER for mid-tier oil & gas peers.

Ezra Holdings - Sell: Cash Drain Continues

9M09 results below consensus – PATMI at US$40mn is only 66% of consensus FY09E of US$61mn. Operationally, results were in line with our forecasts with 9M09 EBIT at 73% of our full year forecast. We raise our earnings estimates by 7-16% to reflect lower than expected financing costs and higher than expected associate income. However, we remain concerned over three key issues:

1) Earnings volatility – While we appear bullish with FY10/11E earnings estimates at 11%/31% above consensus and imply 47%/29% YoY growth, significant part of earnings growth is from i) yard order book fulfillment (lumpy and lacks visibility), ii) energy services division (high operating leverage), and iii) FPSO contribution (delayed since Aug-08). Earnings growth is likely to be volatile.

2) Balance sheet concerns – High net gearing at 49%-owned EOC (2.4x) remains worrisome. We note that Ezra and EOC’s assets are usually packaged to provide an integrated suite of services. We derive a net gearing of 0.5x after incorporating Ezra’s recent share placement and consolidating EOC’s balance sheet with Ezra; gearing is unlikely to improve when considered together with negative operating cash flows for Ezra’s core business.

3) Cash drain – Cash generation has been deteriorating since 1Q09. Working capital adjustment has been negative since 2Q08.
Maintain Sell – We raise our sum-of-the-parts target price to S$1.00 from S$0.95 based on our earnings revisions. We use 6x FY-Aug-10E P/E (15% below peers) to value the core business.

Sembcorp Marine - Secures second SeaDragon US$237 million rig order; crystallization of April '09 option

SMM secures 2nd rig order from SeaDragon worth US$237.3 million; crystallization of April’09 option: Sembcorp Marine has secured a 2nd SeaDragon rig order (first rig order was reported in April 2009) to complete and deliver a Moss Maritime Fully Dynamically Positioned (DP-3) semi-submersible drilling unit. The contract is worth US$237.3 million excluding equipment supplied by owner with the hull having been built in a Russian yard (which arrived at Jurong shipyard in early June 2009). While the first rig (order win in April 2009) is contracted with Pemex for five years, this recent rig is un-contracted for now.

Why is contract value only for US$237.3 million versus new build of US$500-600 million?: Given that the hull has been constructed at the Russian yard and transported to Jurong and the rig contract is on an ex-equipment basis, the contract value is only at US$237.3 million versus a usual price tag of US$500-600 million for a new build semi-submersible.

Year to date "new contracts" stand at S$954 million versus JPM estimate of S$1 billion for FY09E; steady recovery of order-book momentum? Sembcorp Marine has achieved in total, new contracts worth S$954 million versus our FY09E estimate of S$ 1billion. Moreover we believe we could see S$500-800 million upside risk to our current estimate of new contracts as we'd expect to see additional orders in 2H09; however more related to conversion work as against 'new build rig’ orders.

Petrobras still the ‘clearest & biggest opportunity’; SMM willing to consider drillships? During the 1Q09 conference call, management had indicated that they would be willing to consider drillship orders and highlighted they have been approached in the past in this regard. PBR’s 1st batch of 5-7 rigs (out of 28 rigs) is likely to bid out in 2H09.

Ezion Holdings Limited: High risk, high return

Biggest owner of liftboats in Southeast Asia by 2010. Ezion provides marine logistics and support services to the offshore oil and gas industry, and owns a large fleet of 16 ballastable barges. Ezion will also be the biggest owner of liftboats in Southeast Asia when it takes staggered deliveries of four new generation vessels in the next 18 months.

Liftboats are the biggest earnings driver in FY10. The first 2 liftboats will be delivered between late 2009 and 1Q10, and were already chartered out to Ezra Holdings on firm contracts. The second pair has secured LOIs for deployment to a Middle East-based client. These vessels could generate charter revenue of US$16-17m per vessel per year. Key risks are liftboat delivery delays from yards, and clients’ requests for later commencement dates for their contracts with Ezion.

Gorgon Project may boost industry credibility. Ezion is part of a consortium that has secured from Chevron an initial A$350m worth of marine supply contract for the Gorgon Project off the coast of Australia. Ezion would earn project management fees and income from the supply of 9 offshore vessels to the Gorgon projects. Key risks are postponement in vessel supply requirements and poorer-than-expected execution.

Initiate coverage with a BUY rating. We project Ezion to deliver 106% net profit CAGR over the FY09-11 forecast periods, assuming on-schedule deliveries of vessels. As such, we initiate coverage on Ezion with a BUY rating. Our fair value for Ezion is S$0.76; using 10x fully diluted recurring FY10 PE.

SMM recovers amounts due from PetroRig I

With the resolution of the PetroRig I sale, we are raising our recommendation on Sembcorp Marine (SMM) to a Hold. However, the outlook for rig newbuilds still remains muted at this point, and we remain unexcited over the medium term.

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. Diamond has disclosed a price of around US$460, of which SMM will receive its outstanding amount of US$200, plus administrative costs. The balance of the amount will be returned to the original bondholders of the project.

With the healthy reported selling price of US$460m, this assuages concerns of SMM’s other 2 rigs being built under the same specifications for Petromena. SMM has collected 50% of these contracts amounts, and believes that it would be able to dispose of the rigs in a similar manner at no loss if Petromena should once again default on payment. The sale also indicates that demand for such deepwater rigs remains healthy, and that SMM is able to protect itself against such default contingencies.

However, despite continued interest in the deepwater segment, we do not see this translating to significant orders, despite an improving credit environment. SMM’s last reported orderbook stood at $8.4b stretching to 2012, and has since announced orders worth S$230m for an offshore platform contract for SMOE, as well as US$237m outfitting and completion order for a semisubmersible.

We are raising SMM’s price target to $2.73 from $2.31 previously, on higher shipyard multiples in our sum-of-the-parts valuation. Our FY09 net profit forecast of $497m remains unchanged. While 2-yr earnings CAGR is still a healthy 12.7% 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 in the last boom cycle between 2005 and 2008. However, given its respectable earnings visibility and decent dividend yield, we raise the stock to a Hold.

Rickmers Maritime - Share price may see a re-rating should capex funding be resolved

RMT’s management is still evaluating options for 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.

We met up with the management of Rickmers Maritime (RMT) yesterday and discussed the funding of US$712m capex due in 2010 relating to the purchase of four 13,100 TEU containerships to be chartered out to Maersk for 10 years at a daily time charter rate of US$56,491 in 2H10.

Four possible options on the unfunded capex. They are: a) equity/debt funding, possibly on 30:70 basis, 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.

Penalty charges include the deposit and interest payment of 2% above US$ LIBOR. According to RMT’s circular released in Apr 08, the company will be liable for a penalty charge of 2% above US$ LIBOR p.a. on the unpaid amount of the vessel cost if it is late in payment upon delivery of the vessels. Should RMT default on the vessel payment for more than five business days after the due payment date, the deposit of US$10m each for the four Maersk vessels and interest charge of 2% over 3-month US$ LIBOR p.a. on the unpaid amount shall be forfeited to Rickmers Group.

Asset deflation 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-to-value (LTV) covenants of 90% in view of the recent collapse in ship values. That said, the trust is in discussion with its bankers on the possible waiver of the LTV covenants. Should asset prices continue to fall and RMT is unable to obtain a waiver of its LTV covenants, bankers may require the trust to reduce its dividend payout in order to partially pay down its loans or levy a higher cost of borrowing on the company.

Renegotiation of charter rates by the charterers. While RMT’s charterers are top liner companies such as A.P. Moller–Maersk, CMA CMG, Mitsui O.S.K. Lines, Hanjin Shipping and Italia Marittima, there is always the possibility that some charterers may renegotiate charter rates in view of the lack of sharp fall in cargo shipment demand and an oversupply of containerships in the shipping market.

RMT’s share price has risen 53% ytd and we forecast DPU yield 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. Our fair price of S$0.76 is based on 2010 P/B of 0.4x, a shade below US peer Danaos’ P/B of 0.5x as RMT would have a similarly very high gearing of 4.0x, assuming debt financing for US$712m capex.

Mermaid Maritime - A breeze of new life in FY10

Tender rig fleet to fetch better charter rates for new contracts. Mermaid’s existing two tender rigs are still working on contracts that were secured at lower charter rates, which are about 30% below current market rates. We expect these two rigs to fetch 25% higher rates upon expiry of existing contracts, and have assumed three and a half months downtime before they can be deployed for their next offshore jobs. Mermaid would also take delivery of a newbuild tender rig by early FY10, which would provide further earnings lift.

Subsea Division’s contribution to be boosted by 3 new vessels. Mermaid’s current fleet of seven subsea vessels would be gradually boosted to ten in FY10, with full year contributions in FY11. We have factored in 0- 17% dip, vs. record levels in charter rates for Mermaid’s specialized subsea vessels. This is reasonable, given the mild 0-12% dip to-date (vs. peak levels) and the stable rates for the group’s 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). Mermaid is expected to fund its committed capex through internally generated cash flows and external debt, with net gearing at 0.1-0.3x in FY09-11. Our fair value for Mermaid stays at S$0.85, using 7x and 10x blended FY09/10 PE for its subsea engineering business and drilling services, respectively. Maintain BUY.

Ezra - Pushed back project commencement date of EOC’s Thailand FPSO

We maintain our Sell/High Risk recommendation. While recent S$92.4mn share placement will improve balance sheet strength, we deem Ezra’s earnings in FY10-11 as riskier and possibly lumpy as growth will come from yard order book fulfillment (we note no new orders since May-2008), and energy services (high operating leverage as equipment are bareboat chartered-in). Additionally, there is a risk of over-paying for potential acquisitions or slower than expected integration of acquisition target. Valuations are also unattractive – current core business forward PE of 11x is above the industry average of 7x.

Our target price of S$0.95 is based on a sum-of-the-parts valuation, comprising S$0.61/share from Ezra's core business based on 6x FY-Aug-10E PER, S$0.24/share from Ezra's 48.9% stake in Oslo Bors-listed EOC Limited, based on 3.5x Feb-10E EOC earnings and adjusted for Ezra's stake, and S$0.09/share from Ezra's 15.5% stake in SGX-listed Ezion Holdings (based on market value).

We use PER to value Ezra's core businesses as we believe investors will shift focus to the quality of Ezra's near-term earnings instead of the company's asset growth. Our target PER of 3.5x FY-Aug-10E is at ~15% discount to industry average of 7x. While earnings visibility from Ezra's long-term charters would justify a premium to industry PER, this is more than offset by earnings volatility which may persist due to: i) FX fluctuations; ii) greater proportion of revenues from lump-sum projects (e.g. yards, energy services) where margins and execution time-frame (hence revenue recognition) are less predictable. Valuations may stay depressed as a result.

Our target PER of 3.5x for EOC implies ~65% valuation discount to other offshore construction and production peers, justified by EOC's poorer than expected execution of the Thailand FPSO project, potential heavy capex for its Vietnam FPSO project (assuming it wins), and potential one-off charges to be incurred from project delays or inability to secure financing for Vietnam FPSO.

Sembcorp Marine: Offers better risk/reward now

Upgrade to BUY. The risk/reward is more attractive now on potential price catalysts in 3Q09, and we upgrade SMM to BUY. Our fair value is raised to S$3.25, using mid-cycle valuation, and rolling forward to blended FY09/10 EPS on improved margin visibility.

Price catalysts in 3Q09 We see the on-schedule receipts of the next milestone payments for Petroprod's jackup rig (before mid-July 2009), and Seadrill's semi-submersible rig (estimated by end 3Q09) as catalysts for the eventual removal of our S$1.1b order cancellation assumption. This could potentially add >5% to our fair value for SMM. SMM's confidence on contracts execution in 1H09 has also mitigated our concerns on margin pressure for variation orders, we have raised our EBIT margin assumptions for FY09 and FY10, to 9.8% and 9.9% respectively and expect a good set of 2Q09 results to be another price catalyst.

Expect new order wins in 2H09, our assumption unchanged at S$3b. We caution investors against expectations that any SMM's new order win is the start of an uptrend. We maintain our view that an uptrend in new order wins require : 1) An easing of credit crunch through a reduction in credit spread and equity funding requirement, and 2) A lowering of still high construction costs. These pre-conditions are currently not met yet.

CSE Global - a Singapore-listed industrial systems integrator for the oil & gas

CSE Global is leverage play on production cycle which has more visibility and stability. Our discussion with management suggest tenders and order enquiries continue to be healthy despite oil price volatility. CSE Global’s proven execution ability, order book of S$343mn, and ability to maintain margins during 4Q08/1Q09 suggests downside to earnings is limited.

We maintain Buy, but trim earnings by 21-31% due to lower than expected revenue growth since our last update. We raise target price to S$0.75 from S$0.55, based on 8.5x FY10E P/E (raised from 5.5x FY09E PE) as well as roll over to FY10E earnings multiple. Our 8.5x P/E is based on 17% discount to industry PE of ~10x, justified by CSE’s slower EPS growth vs. peers and lower share trading liquidity.

Our target price of S$0.75 (8.5x FY10E P/E) is based on a 17% discount to the industry's P/E of ~10x given CSE's slower EPS growth vs. peers and lower share trading liquidity. We believe the market has yet to fully appreciate CSE's strong business model. CSE does not have direct comparables in Singapore or in the region, and the majority of the oil/gas-related firms now trade at far higher multiples despite lower margins. We use P/E because the share price is closely correlated with earnings growth.

KS Energy - Adjusting for risk and warrants

KS Energy (KSE) announced on 4 June 2009 that it was offering warrants on a one-for-four basis at S$0.20/each. The warrants have a S$1.40 conversion strike price and a conversion period from 7-24 months after issuance.

In our opinion, the company’s issuance of warrants is an unusual choice for raising capital, as 1) it will not immediately raise a significant amount of capital (S$16m-18m in net proceeds from the warrant issuance), and 2) further capital-raising from warrant conversions is uncertain given that the warrants are ‘out of the money’. In our opinion, the warrant issuance is to improve the company’s working-capital liquidity, rather than prepare the balance sheet ahead of any imminent corporate action (eg, an asset acquisition).

We have made some modest adjustments to our FY09-13 balance-sheet and cash-flow assumptions, but no changes to our FY09-13 net earnings forecasts. Our EPS forecasts are also unchanged, as the warrants are currently anti-dilutive. Valuation

We have raised our six-month DCF-derived target price to S$0.92 from S$0.72, due mainly to a reduction in the assumed WACC, to 12.4% from 16.0%. The reduced WACC reflects investors’ shift away from the extreme risk-aversion that was evident from equity valuations in late-2008.Catalysts and action

KSE’s stock has risen significantly since the 28 April 2009 price of S$0.715 on the back of higher crude-oil prices and equity-market levels. However, we think that the company’s fundamentals should continue to be challenged from 2009-11 due to downcycles in jack-up and parts-distribution industries, despite the rebound in crude-oil prices to more than US$70/bbl from US$50/bbl as at 28 April 2009.

From an earnings perspective, KSE is theoretically ex-growth in FY09 and FY10 since it does not have a significant amount of equipment up for new contracts until late 2010. The company may see all four of its jack-ups come up for new contracts in late-2010 and 2011, making the state of the jack-up market very important. We expect jack-up day-rates to remain soft from 2010-11 due to a significant overhang of idle global jack-up capacity.

According to Daiwa’s view, the Straits Times Index and crude-oil prices are both currently more-than-fairly-valued and are at risk of a price correction over the next six months. We expect KSE’s share price to underperform the Straits Times Index if stock indices and/or crude-oil prices decline.