Update on supports and resistances.

Pivot: 4.15

Our preference: Long positions above 4.15 with targets @ 4.6 & 4.85 in extension.

Alternative scenario: Below 4.15 look for further downside with 3.8 & 3.6 as targets.

Comment: a support base at 4.15 has formed and has allowed for a temporary stabilisation.

Key levels
5.15
4.85
4.6
4.34 last
4.15
3.8
3.6

Copyright 1999 - 2013 TRADING CENTRAL

• Two jackup rig orders for USD417m (SGD528m). Sembcorp Marine (SMM)'s PPL Shipyard secured two jackup rig orders from Mexican driller, Oro Negro, for USD417m, bringing the total jackup rigs ordered by Oro Negro to six units. Oro Negro placed its first order for two units inNov 2011 at a price of USD434m, and its second order for another two units in March 2013 for USD417m. The latest rigs (fifth and sixth) arescheduled to be delivered in July 2015 and end-3Q2015 respectively. The rigs will be based on the Pacific Class 400 design, capable of operating in 400 feet water depth and drilling up to 30,000 feet.

• Orders within forecast net orderbook rose to more than SGD15bn. SMM's YTD 2013 order win of SGD3.24bn accounted for 81% of our fullyear forecast. We estimate the latest contract lifted the group's net orderbook to SGD15.2bn, with deliveries extending to 2019. We made no changes to FY13-14F EPS estimates as the YTD orders secured were within our forecast of SGD4bn.

• Repeat jackup orders should lead to better margins. The unit price of the rig at USD208.5m is similar to the contract price secured in March 2013. As this contract is a repeat order for SMM's own design, we believe the group should reap stronger margins from these two rigs.

• Maintain NEUTRAL, SGD4.65 TP. We value SMM based on a sum-ofthe-parts (SOTP) valuation, with its shipyard business at 16x FY13 net operating profit after tax (NOPAT). SMM trades at a 16.1x FY13F P/E, in line with mid-cycle valuations, and we see little upside to our TP of SGD4.65.

Monday, 1 July 2013

Update on supports and resistances.

Pivot: 4.15

Our preference: Long positions above 4.15 with targets @ 4.6 & 4.85 in extension.

Alternative scenario: Below 4.15 look for further downside with 3.8 & 3.6 as targets.

Comment: a support base at 4.15 has formed and has allowed for a temporary stabilisation.

Key levels
5.15
4.85
4.6
4.27 last
4.15
3.8
3.6

Copyright 1999 - 2013 TRADING CENTRAL

Rising interest rates will squeeze margins of rig builders, as drilling companies try to pass on increased financing costs to them while the rig building market has become more competitive with Chinese yards churning out more rigs, said Religare analysts.

Federal Reserve Chairman Ben Bernanke said last week that the US economy was expanding strongly enough for the central bank to begin slowing the pace of its monetary stimulus later this year, sending yields of drilling companies’ bonds up.

“Given the substantial debt financing involved in rigs, when rates rise then somebody’s profitability needs to be impacted and those with the weakest pricing power within the value chain are most likely to be hit,” Religare analysts wrote in a note.

“Offshore yards will have much weaker pricing power versus drillers going forward due to Chinese yards dramatically increasing the supply of rig building capacity.”

Singapore’s Keppel Corporation and Sembcorp Marine have seen their profit margins pressured by competition from shipyards in China that are eagerly waiting to enter the offshore oil and gas equipment industry.

Religare maintained a “Sell” call on Sembcorp Marine and a “Hold” recommendation on Keppel Corporation.

Keppel shares had fallen 1.8 percent so far this year and Sembcorp Marine was down nearly 7 percent, lagging behind the 1 percent loss in Singapore’s benchmark Straits Times Index.

Are Non-Volatile Shares Necessarily Good For Investors?

By Ser Jing Chong - June 14, 2013 | See also: S10S51^STI

• 1
  inShare

“Why do you want to invest?” is a question that will likely prompt unique answers from every individual being asked. But for most, the objective for investing should be the same– we want the best returns we can get. For mutual fund legend Sir John Templeton, his only focus was on “maximum total real return after taxes.”

Sir John was worried about taxes – because he wasn’t in the same position-of-envy that we have as investors in Singapore where there are no taxes levied on our investing gains – but he wasn’t worried about volatility in the market over the long run.   And, neither should we.

The price volatility of any particular share in relation to the volatility of the overall market is often taken to be a reflection of its investing-related risks (when it really shouldn’t be the case) and is known as beta.

It is an anecdotal observation of mine that participants in the stock market are often spooked by volatility. To mitigate their worries over volatile stock price movements, they often start hunting for stocks with low betas.

And, for investors who are focused on volatility, marine engineering firm Sembcorp Marine (SGX: S51) and instant-beverage manufacturer Super Group (SGX: S10) would have looked very appealing on 10 June 2011 with their betas of 0.37 and 0.33 respectively (calculated from their share price histories for three years ending on 10 June 2011) at that time as seen from the graphs below.





With Sembcorp Marine and Super Group’s betas, they would fall by 0.37% and 0.33% respectively if the Straits Times Index (SGX: ^STI) retreated by 1%. That’s great news for investors who are worried about volatility, right? Not so fast, buddy.

An investor who picked Sembcorp over Super Group or vice-versa would have had very different investing experiences over the next two years starting from 10 June 2011. SembCorp would go on to drop by 19% in value, while Super Group clocked 210% gains. Meanwhile, the STI remained essentially flat as shown in the graph below.



Source: Yahoo Finance

Sembcorp Marine and Super Group had very similar historical betas, or volatility, on 10 June 2011 but went on to have markedly different returns. What this means is that, investors who were too concerned with volatility of share prices would have wasted precious time and mental resources that could have been better used to understand their underlying businesses instead.

Super Group’s share price appreciation was driven by its subsequent earnings growth. Investors who drilled deeper into its business prior to 10 June 2011 would have noticed the explosive quarterly revenue growth in the company’s Ingredients Sales division (which often hit triple digit percentages) which ultimately contributed to both overall top and bottom-line increases.

On the other hand, SembCorp Marine’s shares had declined as its earnings fell. Prior to 10 June 2011, it had displayed falling revenues even though its earnings grew as margins improved. Earnings growth is always welcome, but there is a hard-cap on any company’s profit margins and earnings can only grow sustainably if Sembcorp Marine can bring in greater revenues over time. Investors who had focused on its business results might have caught on to the point.

As Foolish investors, we should know better than to worry unduly about the historic volatility of shares based on an archaic financial-metric known as beta and instead, focus on what truly matters – the performance of the underlying business.

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Sembcorp Marine offloads stake in China engineering firm

• Seadrill orders 2 more jack-up rigs from Dalian, bringing total to 6 YTD. The price of USD230m per rig is similar in value to the orders placed in Feb and Mar this year. In total, Seadrill has ordered six jack-up orders from Dalian Shipbuilding Industry Offshore (DSIC Offshore) so far in 2013 and has a eight such rigs currently under construction by DSIC Offshore, including the two units ordered in Nov 2010. All the rigs will be based on F& G JU2000E design. Seadrill also has two jack-up rigs of similar design under construction at Jurong Shipyard.
• Attractive financing drives orders to China. Rig owners are drawn to the attractive take-out financing in China, which is the reason why some orders are going to that country despite execution challenges. Apart from cheaper financing, some yards are also making progress in building jackup rigs. For instance, Dalian has made significant progress in winning orders from blue-chip customers like Seadrill. We see these yards giving Keppel Corp (KEP) and Sembcorp Marine (SMM) a run for their money.
• Shipbuilding orders pick-up may ease competition. Shipbuilding orders in China improved to 1.0m compensated gross tonnage (CGT) per month in 2013 (up to May) compared to 0.54m CGT per month in 2012 but still below the 1.5m CGT per month in 2004 to 2008. We believe a stronger pick-up in global shipbuilding orders, together with closure of inefficient yards in China, will ease the pressure on the offshore markets and consequently be positive for offshore shipyards.
• Maintain Neutral accumulate if prices correct further. We maintain our Neutral rating on KEP and SMM given the limited upside to our TPs. However, we see an opportunity to accumulate on valuations should share prices pull back by another 5% to 10% from current levels.

Update on supports and resistances.

Pivot: 4.15

Our preference: Long positions above 4.15 with targets @ 4.6 & 4.85 in extension.

Alternative scenario: Below 4.15 look for further downside with 3.8 & 3.6 as targets.

Comment: the RSI is bullish and calls for further advance.

Key levels
5.15
4.85
4.6
4.35 last
4.15
3.8
3.6

Copyright 1999 - 2013 TRADING CENTRAL

 

From casinos to rigs

 

 

Reflecting the global financial market trend, speculative rig-building is seeing a shift from the Norwegian market to Singapore, which currently has 13 units of rigs ordered or 15% of the newbuild market share. Swissco Holdings, Falcon Energy and KS Energy are the Singapore-listed O& M plays to watch for in the next two years, with a potential 33% increase in their BV from the sale of rigs. Keppel is the top pick in our coverage.

Shift of wealth to Asia

Of the 90 units of jack-up rigs being built currently, we are certain that 25% are speculative – of which 15% are being ordered by Singapore-incorporated companies, 7% by Luxembourg-based Prospector Offshore and 3% by private equity firm, Landmark Drilling. These speculators are likely to flip the assets and make some quick handsome profits, catalysing their share prices in the process. Favourable financing from the Chinese yards could also minimise risks for these speculators, some with zero capital outlay.

Amid macro noises, orders are up 13% this cycle

Despite the macro noises emanating from the eurozone over the past three years, there has been a stronger flow of rig orders this cycle (2010-13) with 238 rigs vs. 210 for the previous cycle (2005-08). Apart from Petrobras’s mega capex of 28 rigs, we believe that the other growth drivers include 1) a robust replacement cycle, 2) requirements for newer equipment, 3) strong day rates, and 4) attractive financing terms from Chinese yards.

What do we buy (under our coverage) on dips

We see buying opportunities on recent weakness, especially for: 1) Keppel Corp, on peak delivery with back-end loading of profits and margin upside in 2013. 2) Sembcorp Marine, as the stock is trading at its low, following a margin letdown in 3Q12. The stock bounced back 15% two months later. 3) Vard Holdings, in view of its overall quality. It also offers a 4.6% dividend yield, which is the highest in our small-mid-cap offshore & marine universe.