Global shipbuilding

Global shipbuilding: UBS advices to be selective on shipbuilding stops in weak oil price environment, reiterates Buy on Keppel Corp (TP $11.02), Neutral on Yangzijiang (TP $1.21) and Sell on Sembcorp Marine (TP $3.56). In the environment of weak commodity prices, lower trading volume and uncertain emission standards regulatory outlook, UBS revises down 2014E/15E ship order estimates by 27%/33% respectively. Global utilisation for 2015E is pegged at 58%, and ship prices are to come under pressure. The LNG space is a bright spot but is also clouded by outlook uncertainty. A wider adoption of LNG bunkering could leave current operators with an obsolete fleet. However, acquiring LNG/dual fuel engine ships now could expose owners to risk from the uncertainty of timing for LNG infrastructure investment. Keppel has been performing up to expectations and keeps a sustainable dividend payout policy. Keppel’s current main/flagship products (jackups/FLNGVs), customer diversity as well as close government links should help its order book through challenging times. Yangzijiang’s gross order book stands at US$4.6b comprising of 114 vessels, which should keep utilisation at its four shipbuilding yards fairly high. Almost a third of its pre-tax earnings is derived from non-shipbuilding activities – returns from its HTM financial products and profit from its microfinancing divisions. Although Sembcorp Marine enjoys similar customer diversity and close government links, stock has priced in rich valuations and upside is limited. Singapore and Korea shipbuilder stocks display high correlation (93% and 80%) to oil prices but that for Japan (0%) and China (39%) are low.