Singapore Rigbuilders

Transcription

1 Singapore Industry Industry Focus Singapore Rigbuilders Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Jan 2016 Merger on the cards? Temasek weighing various options of Keppel and SCI divesting non-core assets and issuing rights Divestment of M1 by Keppel possible; Keppel has ample debt headroom before tapping on equity market Revives speculation on merger and restructuring of Singapore rigbuilders NEUTRAL STI : 2, For an in-depth sector discussion, please click here Bloomberg reported that Temasek Holdings is discussing various options for Keppel Corp (Keppel) and Sembcorp Industries Ltd.(SCI), ranging from divesting non-core assets to selling shares, to brace for a prolonged sector downturn, during a regular portfolio companies review meeting on 25 Jan. Divestment of M1 possible. In our view, the divestment of non-core investment like M1 is a strong possibility as it has been parked under the investment arm for several years. This could free up over S$400m for capital recycling. Our Telco analyst has a HOLD call on M1 with TP of S$2.60, implying 10% upside potential. We see lower likelihood of divestment of K-REIT (worth S$1.2bn) as it is one of the two property fund management vehicles for Keppel Land, although it remains to be seen if Keppel will pare down its stake in K-REIT. As for Keppel Infrastructure Trust (KIT) and Keppel DC REIT, which are worth S$330m and S$250m respectively, both are core to Keppel and thus unlikely to be put on sale. Other investments - K1 Venture, KrisEnergy and Dyna-Mac - are possible divestment candidates but values are relatively small, worth a total of $265m. Fresh injection of capital via rights issues for Keppel Corp and SCI are arguable as the stocks are trading at 20% to 30% discounts to their respective book values. In addition, Keppel has ample debt headroom of approx S$5bn before hitting its desirable net gearing of <1x. SMM is currently trading at 1.1x PB, but its book value is subject to write downs. While we cannot rule this out completely, unless the GLCs have a strong basis to raise fresh equity, investors may not take the news in a positive light as the exercise will be dilutive to ROE. Merger on the cards? Recent spate of events has turned for the worse for Singapore s rigbuilders. The above unverified discussions by Temasek, if true, raise concerns over the business outlook, reviving speculation of restructuring of the two rigbuilders. We believe injection of Keppel O&M into SMM via RTO could be feasible. Typically, the takeover target commands a share price premium post announcement, but in this case, it might be risky to play this angle without clarity on restructuring plans, timing, and financial details etc. In this report, we lowered our TP for SMM to S$1.35 and SCI s TP is adjusted to S$3.50 accordingly. Stripping out the market value of SMM, Salalah and Gallant Venture, SCI s utilities business is valued at unwarranted <5x FY16 PE. Analyst Janice CHUA janicechuast@dbs.com Pei Hwa Ho peihwa@dbs.com STOCKS Keppel Corporation Sembcorp Industries Sembcorp Marine Source: DBS Bank Target Performance (%) Price Mkt Cap Price S$ US$m S$ 3 mth 12 mth Rating , (33.9) (41.9) HOLD , (38.1) (48.6) BUY , (36.7) (52.4) FV ed: JC / sa: YM

2 Industry Industry Focus Singapore Rigbuilders Temasek could be stepping in to prepare for longer winter Bloomberg reported that Temasek Holdings is discussing options for its 21%-owned Keppel and 49.5%-owned SCI, ranging from divesting their non-core assets to selling shares, to brace for a prolonged sector downturn. Divestment possibilities revolve around Keppel selling its 19.1% stake in wireless operator M1 Ltd. and paring its 44.6% interest in office landlord Keppel REIT. Temasek is said to be also weighing the possibility of Keppel and SCI selling stock through rights offerings. The topic was brought up during a regular Temasek meeting to review its portfolio companies on 25 Jan, and to focus on how Temasek can preserve the value of its investments amid a downturn in the oil-rig sector, which will be shared with the two companies boards. Divestment of M1 by Keppel possible. In our view, the divestment of Keppel s non-core investment like M1 is a strong possibility as it has been parked under the investment arm for several years. Divestment of M1 could free up over S$400m for capital recycling. Our Telco analyst has a HOLD call on M1 with TP of S$2.60 implying 10% upside potential. We see lower likelihood of divestment in K-REIT (worth S$1.2bn) as it is one of the two property fund management vehicles for Keppel Land. As for the other significant key holdings - KIT and Keppel DC REIT - which are worth S$330m and S$250m respectively, both are core to Keppel or are its growth engines, thus unlikely to be put on sale. Other investments, such as K1 Venture, KrisEnergy and Dyna- Mac are possible but the market value is insignificant and stock prices for KrisEnergy and Dyna-Mac have also plunged amid the oil crisis. Keppel s main holdings Market cap (S$ m) Keppel's stake Keppel's share (S$ m) Keppel REIT 2,703 45% 1,206 M1 2,223 19% 422 KIT 1,813 18% 330 Keppel DC REIT % 256 K1Venture % 139 KrisEnergy % 92 Dyna-Mac % 34 Source: Bloomberg Finance L.P., Companies SCI s other businesses are immaterial. Total asset value for SCI s other businesses (which are not classified under the three key pillars namely Utilities, Marine and Urban Development) - Singapore Mint (100%), Sembcorp Design and Construction (100%) and Shenzhen Chiwan Sembawang Engineering Co (32%) are probably only <S$100m, does not quite move the needle. In addition, the former two are handling largely government related projects. Fresh injection of capital via rights issues for Keppel Corp and SCI are arguable as they are trading at 20% to 30% discounts to their respective book values. In addition, Keppel and SCI have ample debt headroom of approx S$5bn/ S$3bn before hitting their desirable net gearing of <1x. SMM is currently trading at 1.1x PB, but its book value is subject to write downs. While we cannot rule this out completely, unless the GLC has a strong basis to raise fresh equity, investors may not take the news in a positive light as the exercise will be dilutive to ROE. Ample debt headroom Net gearing Est. debt headroom Keppel 0.53x S$ 5.0bn SCI 0.55x S$ 2.9bn Source: Companies, DBS Bank Page 2

3 Industry Industry Focus Singapore Rigbuilders Recent spate of events has turned for the worse for Singapore s rigbuilders. The slump in oil prices to <US$30/bbl over the past month and possible bankruptcy of Sete Brasil have heightened the risks for Keppel and SMM. The unverified Temasek discussion during a review meeting has raised the level of speculation of a potential restructuring between the three listed entities. There are a few possibilities: a) SCI privatizes SMM and merge it with Keppel. Less likely scenario as it involves fresh capital of S$1.4bn (assume 20% share price premium) for SCI to privatise SMM, given the possibility of a prolonged downcycle. b) Keppel injects O&M division into SMM via a reverse takeover. Keppel and SCI will jointly own SMM, which remains listed. Positives Keppel s shipyards in Tuas, Singapore is old while SMM has built a new world class shipyard in Tuas, having invested >S$1bn into the Singapore yard. This will lead to shrinkage in capacity once older yards at Keppel and SMM (Sembawang) are retired. The downturn in industry saw major retrenchments Keppel laid off 25% of its direct and subcontract workers last year. A merger could lead to cost savings and combining the strengths of both Keppel Corp and SembMarine to consolidate its leadership position in the global playing field. Keppel O&M s book value stood at S$1.4bn as of end 2015, down from S$1.8bn in 2014 partly due to S$230m provision for Sete Brasil projects in 4Q15. Stripping out the estimated market value for Property, Infrastructure and its holdings in listed entities, market is valuing Keppel O&M at 0.5x PB, a far cry from the 3-4x before this oil rout. Keppel O&M has empirically been valued at a premium over SMM due to its much higher ROE and market leadership. In our valuation, we have ascribed 2x PB for Keppel O&M, implying a valuation of S$2.6bn. This translates to 4x FY15 O&M PATMI, which has plunged almost 50% y-o-y. Implied value of Keppel O&M S$ m Basis Market capitalisation of Keppel 8,562 Market 26 Jan Market value for listed holdings 1,098 Market 26 Jan Est. market value for property 6,911 25% discount to NAV Est. market value for % discount to NAV infrastructure Congolomerate discount 10% Implied market value for Keppel 662 O&M Implied valuation for Keppel 0.48 PB valuation (x) O&M SMM s book value was around S$3.0bn as of end Sept Applying the AFC low of 0.9x, this translates to S$2.7bn or S$1.29 per share. This implies >10x FY15 PE. Given the expected provisions ahead, we expect downside to its book value. In our thematic report Sea of Change dated 6, Aug 2015 (pg 28 to 35) - we had highlighted the need for a merger between the two yards, and examined the merits of a merger. Recommendation Maintain HOLD on Keppel. We maintain our HOLD call on Keppel with recently revised TP of S$5.25 post its FY15 results. Lowering TP for SMM. Given the worsening situation in Brazil, we are reducing our SMM valuation multiple to 0.9x FY16 PB (from 1.2x previously), in line with AFC low. TP for SMM is thus lowered to S$1.35. Maintain FULLY VALUED. SCI is too cheap to ignore. Target price for SCI is adjusted to S$3.50 following the change in SMM s TP. Maintain BUY for SCI. Stripping out market value for SMM and holdings in Salalah and Galant Venture, utilities business is valued at an unwarranted <5x FY16 PE or approx S$2bn, given the stable nature of the business. We believe market has probably overpenalized SCI on speculation of a possible SMM privatization. Now it seems a more likely scenario could be the merger of Keppel O&M and SMM. Implied value of SCI s Utilities S$m SCI's market capitalisation 3,986 SCI's share of market capitalisation for: SMM 1,710 Salalah 323 Gallant Venture 66 Congolomerate discount 10% Implied value for Utilities 2,096 Implied FY16 PE for Utilities 4.8 (x) Our Telco analyst, Sachin Mittal has a HOLD call on M1 with TP at S$2.60. This implies 10% upside from current level. Page 3

4 Industry Industry Focus Singapore Rigbuilders RNAV valuation for Keppel Value (S$ m) Metrics Market v alue of listed entities 1,161 Less: book value 757 Surplus from listed associates (1) 405 Surplus - Property (2) (1,212) 0.85x P/Bv, less book value Surplus - Offshore/Marine (3) 1,357 2x P/BV, less book value Surplus - Infrastructure (4) (287) 10x FY16 net profit, less book value Net Surplus (Listed and unlisted entities) 262 ( ) Add: Book value (less minorities) as of end FY15 10,381 RNAV 10,643 RNAV per share (S$) 5.83 F air v alue for KEP (S$) % conglomerate discount RNAV valuation for SCI Value Basis (S$ m) Sembcorp Marine 1,710 Fair value for Sembcorp Marine Gallant Ventures 66 Share price Salalah % stake 2,100 Less: book value of listed companies (2,035) Surplus from listed companies 65 Utilities (Surplus) 961 Based on 11x FY16 PE, less book value Urban Development (245) Based on 11x FY16 PE, less book value Net Surplus 781 Book value as of end FY14 6,268 RNAV 7,049 RNAV per share (S$) 3.92 F air v alue (S$) % conglomerate discount Page 4

5 Industry Industry Focus Singapore Rigbuilders Appendix Page 5

6 Industry Industry Focus Singapore Rigbuilders Appendix I - Keppel Corporation s Group Structure Source: Company Appendix II Sembcorp Industries Group Structure Source: Company Appendix II Sembcorp Industries Group Structure Sembcorp Industries 100% 61.1% 100% Sembcorp Utilities Sembcorp Marine Sembcorp Development Other Businesses Sembcorp Design and Construction 100% Shenzhen Chiwan Sembawang Engineering Co 32% Singapore Precision Industries/ Singapore Mint 100% Page 6

7 Industry Industry Focus Singapore Rigbuilders Company Guide Page 7

8 Singapore Company Guide Keppel Corporation Version 2 Bloomberg: KEP SP Reuters: KPLM.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Jan 2016 HOLD Last Traded Price: S$4.71 (STI : 2,545.61) Price Target : S$5.25 (11% upside) Potential Catalyst: Sharp oil price recovery Where we differ: In line Analyst Janice CHUA janicechuast@dbs.com Pei Hwa Ho peihwa@dbs.com Price Relative S$ Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Keppel Corporation (LHS) Relative Index Relative STI INDEX (RHS) Forecasts and Valuation FY Dec (S$m) 2014A 2015A 2016F 2017F Revenue 13,283 10,296 8,576 8,846 EBITDA 3,155 2,280 1,953 1,999 Pre-tax Profit 2,889 1,997 1,551 1,569 Net Profit 1,885 1,525 1,204 1,217 Net Pft (Pre Ex.) 1,444 1,476 1,204 1,217 Net Pft Gth (Pre-ex) (%) (18.5) 1.1 EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) 2 2 (18) 1 Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): - - Consensus EPS (S cts): Other Broker Recs: B: 5 S: 4 H: 12 Source of all data: Company, DBS Bank, Bloomberg Finance L.P Bracing for a prolonged winter Reiterate HOLD with lower TP of S$5.25. While value has emerged after the violent sell-off in response to the Sete Brasil news, we prefer to monitor the development in Brazil and oil market before revisiting Keppel. Dividend yield remains decent at 5.5% despite reduction in payout ratio from 50% to a more sustainable 40%, still within their guidance of 40-50%. Our TP is lowered to S$5.25, largely attributable to lower valuation for O&M segment. Offshore & Marine business weighing the group down. The uncertainty in Brazil is worrisome. The key shareholder of Sete Brasil has voted against the filing of bankruptcy protection and scheduled to meet again in mid-feb to decide the fate of the company. O&M outlook is also plagued by the depressed oil prices. Rigbuilding is entering a prolonged cyclical downturn and competition is intensified. Keppel secured S$1.8bn non-rig new orders last year, a far cry from their usual S$4-6bn wins. As a result, orderbook dwindled to S$9bn, from S$12.5bn a year ago, implying declining top line and earnings ahead. Property business is a mixed bag; infrastructure should bottom out. Keppel sold over 4,570 homes in FY15, with 72% from China alone, marking an improvement over the total of 2,400 sold in FY14. Management is optimistic of stronger home sales in For infrastructure, with the handover of both phases of the Greater Manchester EPC project and the Doha North sewage treatment project having incurred its final provision of just under S$200m in FY15, Keppel Infrastructure should see its profitability improve thereafter. Valuation: Our TP of S$5.25 is based on sum-of-parts : (1) O&M segment is valued at 2x P/BV, (2) infrastructure is valued at 10x PE on FY16 earnings, (3) Property segment is valued at 0.85x P/BV, and (4) market values/estimated fair values are used for listed subsidiaries. Key Risks to Our View: O&M segment could fare worse than expected. We forecast revenues from Keppel O&M falling to the ~S$5.4bn and S$5.8bn levels in FY15 and FY16 respectively, from S$7-8bn p.a. during FY The collapse of Sete Brasil and continued depletion of the orderbook, coupled with deferments, could pose downside risks to our forecast. At A Glance Issued Capital (m shrs) 1,811 Mkt. Cap (S$m/US$m) 8,530 / 5,980 Major Shareholders Temasek Holdings Pte Ltd (%) 21.0 Blackrock (%) 6.0 Aberdeen (%) 5.8 Free Float (%) m Avg. Daily Val (US$m) 25.2 ICB Industry : Oil & Gas / Oil Equipment; Services & Dist ed: TH / sa: YM

9 Keppel Corporation CRITICAL DATA POINTS TO WATCH Earnings Drivers: Orderbook the key driver of Keppel O&M s earnings; FLNG provides potential upside. Keppel O&M secured S$1.8bn in order wins in FY15, dismal-looking compared to its 2010 and 2011 full-year peak of S$10.0bn. Meanwhile, a declining net orderbook means revenue recognition should be stretched over a longer period, impacting earnings. Weak order wins have resulted in Keppel being assailed on three fronts: i) an oversupply of rigs, particularly jackups, as we enter the peak of the rig delivery cycle; ii) low oil prices; and iii) competition from Chinese yards. Scrapping of old rigs (>30 years old), estimated to constitute ~15% of the current fleet, could help push the market back into balance. An oil price rebound would also improve rig utilisations, hence spurring capex spend and order wins. In terms of growth potential, Keppel s first-mover advantage in the FLNG conversion market could provide earnings upside; customer Golar has already awarded a 3rd FLNG project. Residential home sales in China and Vietnam are the main drivers of Keppel Land s revenue and earnings. In China, further relaxation of cooling measures, urbanisation and low mortgage rates resulting from central bank easing, seem to be encouraging residential property sales. Vietnam is another emerging market for Keppel, accounting for 20% of its home sales in FY15. Singapore unit sales should be dampened by weak buyer sentiment due to the continuing effects of government tightening measures, a flood of completions in and slowing government land sales (GLS) factors which signal falling ASPs. Infrastructure division earnings buoyed by handover of problematic assets. The bad apple situation with Keppel Infrastructure s EPC projects has improved with the handover of all the two Greater Manchester EfW Plants and the Doha North in Thus, lower EPC provisions going forward should give a boost to earnings in the short term. Value-unlocking divestments can provide earnings upside. Divestments can free up cash to be invested in more profitable areas or to pay down debt. In Keppel s case, it may also reduce the conglomerate discount on its stock. M1 is a possible candidate for sale; its fundamentals are uninspiring and our telecom analyst has a HOLD call on this stock as of this report s writing. We estimate Keppel Corp s stake in M1 to be ~S$440m. Injection of Infrastructure assets such as the Woodlands Wafer Fab Park into KIT, to whom Keppel Infrastructure acts as sponsor, could be another alternative. O&M order wins (S$ m) 6,754 6,300 5,400 4,974 4,500 3,600 3,000 3,000 2,700 1,800 1, A 2014A 2015A 2016F 2017F Offshore & Marine Revenues (S$m) 9,000 8,556 8,000 7,126 7,000 6,241 6,000 5,419 5,846 5,000 4,000 3,000 2,000 1, A 2014A 2015A 2016F 2017F Property Revenues (S$m) 2,500 2,000 1,926 1,768 1,729 1,734 1,597 1,500 1, A 2014A 2015A 2016F 2017F Infrastructure Revenues (S$m) 4,000 3,459 3,500 3,000 2,933 2,500 2,058 2,000 1,500 1,351 1,332 1, A 2014A 2015A 2016F 2017F Page 9

10 Keppel Corporation Balance Sheet: Following the privatisation of Keppel Land in 1Q15, Keppel Corp s net gearing has increased to 0.42x as of 2Q15 and 0.53% as of end-2015 versus 0.11x at year-end FY14. However, the increase in gearing stems from a lower shareholder s equity and cash balance due to a largely cash funding of the privatisation. Share Price Drivers: Recovery in oil prices would support the share price. Keppel O&M would benefit if oil prices recover to at least above the $60/bbl level, we think, which would trigger more offshore oil & gas capex spend. Announcement of new order wins. Strong order win announcements could push up the share price, as investors reward greater visibility on revenues and earnings. Leverage & Asset Turnover (x) A 2014A 2015A 2016F 2017F Gross Debt to Equity (LHS) Asset Turnover (RHS) S$m 1, , Capital Expenditure Key Risks: Competition from foreign yards. Keener competition from Chinese yards, which are usually aggressive in their pricing and lax with payment terms, as well as Korean peers, may affect order wins and profitability, especially if Keppel starts to offer concessions to protect market share. Further deferments possible if oil prices remain subdued. Since the oil price started declining in mid-2014, we have seen oil majors and asset owners slash capex spending substantially, which has hit the yards hard. Meanwhile, deliveries of newbuilds and conversions already under construction are being delayed a situation which could worsen if oil prices remain low. Company Background Keppel is a diversified conglomerate with its core businesses in offshore marine (O&M), property investments and development, and infrastructure-based activities in Singapore and the region. O&M is the largest segment that typically contributes about two-thirds of group revenue. It possesses strong market leadership positions in rigbuilding, particularly for jackups and semi-submersibles, FPSO conversion, FLNG conversion, repair and construction of high-end specialised vessels. SOTP A 2014A 2015A 2016F 2017F Capital Expenditure (-) ROE (%) 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2013A 2014A 2015A 2016F 2017F Forward PE Band (x) (x) sd: 15.4x sd: 13.9x 12.3 Avg: 12.3x sd: 10.7x 2sd: 9.1x Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 PB Band (x) (x) Value (S$ m) Metrics sd: 2.67x Market value of listed entities 1,161 Less: book value 757 Surplus from listed associates (1) 405 Surplus - Property (2) (1,212) Surplus from Keppel Land, Keppel Harbour site, using ASP of S$1,500psf Surplus - Offshore/Marine (3) 1,357 2x P/BV, less book value Surplus - Infrastructure (4) (287) 10x FY16 net profit, less book value Net Surplus (Listed and unlisted entities) 262 ( ) Add: Book value (less minorities) as of end FY13 10,381 RNAV 10,643 RNAV per share (S$) sd: 2.27x 2.1 Avg: 1.87x 1.6 1sd: 1.47x 1.1 2sd: 1.07x 0.6 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Fair value for KEP (S$) % conglomerate discount Source: DBS Bank Page 10

11 Keppel Corporation Key Assumptions FY Dec 2013A 2014A 2015A 2016F 2017F O&M order wins (S$ m) 6,754 4,974 1,773 3,000 3,000 Segmental Breakdown FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (S$m) Offshore and Marine 7,126 8,556 6,241 5,419 5,846 Property 1,768 1,729 1,926 1,734 1,597 Infrastructure 3,459 2,933 2,058 1,351 1,332 Investments Others N/A N/A N/A N/A N/A Total 12,380 13,283 10,296 8,576 8,846 EBIT (S$m) Offshore and Marine 1,059 1, Property Infrastructure Investments Others 7.26 (1.6) Total 2,134 2,373 1,514 1,363 1,401 EBIT Margins (%) Offshore and Marine Property Infrastructure Investments Others N/A N/A N/A N/A N/A Total Income Statement (S$m) FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 12,380 13,283 10,296 8,576 8,846 Cost of Goods Sold (8,604) (9,245) (7,023) (5,480) (5,658) Gross Profit 3,777 4,038 3,273 3,096 3,188 Other Opng (Exp)/Inc (1,642) (1,665) (1,760) (1,732) (1,787) Operating Profit 2,134 2,373 1,514 1,363 1,401 Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc 19.5 (0.9) (35.5) (171) (191) Exceptional Gain/(Loss) Pre-tax Profit 2,794 2,889 1,997 1,551 1,569 Tax (397) (462) (404) (264) (267) Minority Interest (551) (541) (68.3) (83.7) (84.6) Preference Dividend Net Profit 1,846 1,885 1,525 1,204 1,217 Net Profit before Except. 1,412 1,444 1,476 1,204 1,217 EBITDA 3,017 3,155 2,280 1,953 1,999 Growth Revenue Gth (%) (11.3) 7.3 (22.5) (16.7) 3.2 EBITDA Gth (%) (12.3) 4.6 (27.7) (14.3) 2.3 Opg Profit Gth (%) (18.6) 11.2 (36.2) (9.9) 2.8 Net Profit Gth (Pre-ex) (%) (26.2) (18.5) 1.1 Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) NM 2, Page 11

12 Keppel Corporation Quarterly / Interim Income Statement (S$m) FY Dec 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 Revenue 3,925 2,814 2,563 2,440 2,480 Cost of Goods Sold (2,803) (1,803) (1,920) (1,535) (1,765) Gross Profit 1,122 1, Other Oper. (Exp)/Inc (196) (613) (229) (534) (384) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (23.8) (5.2) (11.3) (9.6) (9.4) Exceptional Gain/(Loss) Pre-tax Profit 1, Tax (136) (81.3) (88.0) (97.0) (138) Minority Interest (299) (13.9) (13.1) (9.5) (31.8) Net Profit Net profit bef Except EBITDA 1, Growth Revenue Gth (%) 23.3 (28.3) (8.9) (4.8) 1.6 EBITDA Gth (%) 78.9 (58.0) 9.0 (6.9) 20.9 Opg Profit Gth (%) 63.8 (57.0) 4.0 (10.6) (10.7) Net Profit Gth (Pre-ex) (%) 11.6 (6.3) (55.2) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (S$m) FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 3,798 2,673 2,846 2,964 3,075 Invts in Associates & JVs 5,482 4,988 5,522 5,820 6,116 Other LT Assets 2,818 2,706 3,988 3,988 3,988 Cash & ST Invts 6,010 6,107 2,118 1,838 2,042 Inventory 8,995 10,681 10,651 10,089 10,408 Debtors 1,916 2,510 3,299 2,859 2,949 Other Current Assets 1,037 1, Total Assets 30,056 31,555 28,932 28,067 29,086 ST Debt 517 1,796 1,657 1,657 1,657 Creditor 5,409 5,581 5,752 4,764 4,915 Other Current Liab 3,416 3,597 2,498 1,949 1,998 LT Debt 6,583 5,587 6,602 6,602 6,602 Other LT Liabilities Shareholder s Equity 9,701 10,381 11,096 11,683 12,419 Minority Interests 3,988 4, Total Cap. & Liab. 30,056 31,555 28,932 28,067 29,086 Non-Cash Wkg. Capital 3,123 5,902 6,209 6,743 6,953 Net Cash/(Debt) (1,090) (1,275) (6,141) (6,420) (6,217) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) 12.7 (5.1) Z-Score (X) Page 12

13 Keppel Corporation Cash Flow Statement (S$m) FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 2,794 2,889 1,997 1,551 1,569 Dep. & Amort Tax Paid (585) (328) (302) (353) (264) Assoc. & JV Inc/(loss) (626) (504) (504) (350) (350) Chg in Wkg.Cap. (492) (340) (198) (445) (213) Other Operating CF (709) (1,960) (1,174) Net Operating CF Capital Exp.(net) (903) 379 (1,142) (350) (350) Other Invts.(net) Invts in Assoc. & JV (473) 231 (341) (149) (148) Div from Assoc & JV Other Investing CF 431 (144) 1, Net Investing CF (678) (298) (296) Div Paid (843) (1,029) (956) (617) (481) Chg in Gross Debt 2, Capital Issues Other Financing CF 201 (46.5) (3,279) Net Financing CF 1,528 (769) (3,302) (617) (481) Currency Adjustments Chg in Cash 1, (3,082) (280) 203 Opg CFPS (S cts) Free CFPS (S cts) (15.4) 22.0 (59.1) Target Price & Ratings History S$ Jan-15 May-15 Sep-15 Jan-16 Note : Share price and Target price are adjusted for corporate actions S.No. Date Closing Price Target Price Rating 1: 18 May BUY 2: 22 Jun BUY 3: 10 Aug HOLD 4: 31 Aug HOLD 5: 18 Sep HOLD 6: 23 Oct HOLD 7: 26 Oct HOLD 8: 16 Nov HOLD 9: 11 Jan HOLD 10: 18 Jan HOLD 11: 22 Jan HOLD 12: 25 Jan HOLD Source: DBS Bank Page 13

14 Singapore Company Guide Sembcorp Industries Version Bloomberg: SCI SP Reuters: SCIL.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Jan 2016 BUY Last Traded Price: S$2.23 (STI : 2,545.61) Price Target : S$3.50 (57% upside) (Prev S$3.80) Potential Catalyst: Ramp up of India power plant, improvement of marine business Where we differ: In line Analyst Janice CHUA janicechuast@dbs.com Pei Hwa Ho peihwa@dbs.com Price Relative S$ Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Sembcorp Marine (LHS) Relative STI INDEX (RHS) Relative Index Forecasts and Valuation FY Dec (S$m) 2014A 2015F 2016F 2017F Revenue 10,895 8,885 9,572 9,989 EBITDA 1,612 1,312 1,383 1,454 Pre-tax Profit 1,246 1, ,009 Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) (2.4) (33.5) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) (2) (34) 18 6 Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) nm EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (S cts): Other Broker Recs: B: 9 S: 3 H: 6 Source of all data: Company, DBS Bank, Bloomberg Finance L.P Too cheap to ignore Fear over SMM privatization overdone. SCI s share price corrected 24% YTD following market chatters over its 60.6%-owned Sembcorp Marine (SMM) s customer, Sete Brasil s possible backruptcy protection and SCI privatizing SMM. In our opinion, the more likely scenario of rigbuilders restructuring would be the injection of Keppel O&M into SMM. Stripping out market value of SMM, Salalah and Gallant Venture, utilities business is valued at an unjustifiably low valuation of <5x FY16 PE vs historical mean of 11x. Our SOTP-based TP is adjusted down slightly to S$3.50, reflecting the downgrade in SMM s TP. This translates to 1.0x P/Bv, which is 10% below GFC trough, implying 57% upside potential. We believe this is a fair multiple in view of the 10% ROE and 5% dividend yield. DPS uplift from divestment gains. We expect SCI to maintain similar payout of 16 Scts in FY15 (including 4 Scts interim dividend) despite the decline in recurring PATMI. The successful divestments of SembSita and Bournemouth Water, are expected to contribute 6.5 Scts to DPS, assuming a 30% payout ratio. Thereafter, DPS should normalize to 12 Scts per annum, representing a decent 4% dividend yield. Growing utilities business in emerging markets. The first India power plant, of which its first unit has been operational since April and the second unit in mid-sept, had incurred total startup losses of S$21m in the past two quarters. The plant is likely to break even this year and contribute to SCI s bottom line from 2016 onwards with better economies of scale after the second unit's ramp-up. This would mitigate earnings decline from Singapore power plants while other overseas utility businesses are expected to be stable this year. Besides, SCI has made its foray into other emerging markets Bangladesh and Myanmar, underpinning the longer-term growth prospects of its utilities segment. Valuation: Given its diverse earnings stream and various listed assets, we derive our fair value on SCI based on the sum of its different parts, which include market valuations of its stakes in listed companies Sembcorp Marine (SGX-listed, 60.6% stake), Gallant Venture (SGX-listed, 11.96% stake) and Salalah (Muscat stock exchange, 40% stake) and earnings from utilities and urban development. For its holding company position, we have applied a 10% conglomerate discount to the reappraised net asset value (RNAV). Our TP is lowered slightly to S$3.50 (from S$3.80 previously) as we imputed the downgrade in SMM s TP from S$1.85 to S$1.35. Key Risks to Our View: Key risks to earnings are further deferments / cancellations of marine projects, deterioration of Singapore power s spark spread, and execution hiccups in India power plants. At A Glance Issued Capital (m shrs) 1,785 Mkt. Cap (S$m/US$m) 3,981 / 2,791 Major Shareholders Temasek Holdings Pte Ltd (%) 49.5 Mondrian Investment Partners (%) 5.0 Free Float (%) m Avg. Daily Val (US$m) 10.4 ICB Industry : Oil & Gas / Oil Equipment; Services & Dist sa: YM

15 Sembcorp Industries Marine contract wins CRITICAL DATA POINTS TO WATCH Earnings Drivers: Utilities projects pipeline should progressively add to earnings. New facilities will add to SCI s power generation and water treatment capacities, which should increase earnings assuming the operations are profitable. A total of 2,588MW of power generation capacity (excluding the 660MW TPCIL Unit 1 plant in India, already online), 140tph of steam capacity and 1.6million m3/day of water treatment capacity is expected to be added from now until This roughly translates to a 31%, 3% and 17% increase in power, steam and water treatment capacities respectively. Narrowing spark spreads in Singapore have hit power generation earnings. </b>growth in supply of electricity outpacing the growth in consumption led to Uniform Singapore Energy Price (USEP) falling by 22.1% y-o-y in 2013 and by further 20.8% in 2014, shrinking the generator s spark spread a barometer of profits on electricity sales. However, the impact will not be significant, as Singapore power generation only makes up 6-7% of SCI s net income. Nonetheless, an increase in USEP prices going forward will help earnings. Greater contribution from non-singapore power generation facilities would also alleviate the pressure on profitability. Marine business (SMM) earnings are orderbook-driven. Sembcorp Marine s (SMM) orderbook has declined to S$10.9bn as of end-2q15, in tandem with the downturn in the offshore oil & gas industry. Order wins of S$1.4bn in 1H15 were weak but respectable amid the current environment; 2013 and 2014 saw full-year order wins of S$4.2bn. The current orderbook stretches until 2019, but there is risk of order deferments which would spread revenues and earnings thinner given that drilling units account for 76% of its value. It has primarily been the low oil prices that saw oil majors and asset owners defer capex spend. Hence, a rebound in oil prices would likely trigger more order wins for SMM, which would be positive for earnings. 4,000 3,500 3,000 2,500 2,000 1,500 1, ,193 4,192 2,800 2,500 2, A 2014A 2015F 2016F 2017F SCI Group Net Profit for 9M15 - Total S$488m 4% 31% 7% -4% 63% Utilities Marine Urban Development Other Businesses Corporate Utilities 9M15 Net Profit by Geography - Total S$306m -11% 3% 8% 24% 12% 21% 32% 11% Singapore Rest of ASEAN, Australia & India China Middle East & Africa UK The Americas Corporate Significant Item Utilities in Singapore 9M15 Net Profits - Total S$99.4m Urban Development business provides growth opportunities. Urban Development accounts for c.5% of SCI s bottomline. Thus, a strong performance of this segment will not move the needle too much for now, but represents an avenue for growth. SCI has about 3,500ha of saleable land remaining across China, Indonesia and Vietnam, which it can develop. However, headwinds in the form of delays in China land sales have proven to be a stumbling block recently; better sales momentum, which we are seeing a glimmer of, would give some earnings uplift. 38% 27% 35% Energy Water On-site Logistics & Solid Waste Management Page 15

16 Sembcorp Industries Balance Sheet: SCI s gearing continues to rise, with net gearing at 0.5x as of 2Q15 a stark contrast to a net cash position in 2013; increasing leverage at SMM has been the main reason for the increase in debt levels. The slight uptick in 2Q15 was a result of SCI acquiring a 60% stake in Green Infra, which was partly funded with debt. Overall though, gearing remains at palatable levels Leverage & Asset Turnover (x) Share Price Drivers: Oil price rebound would drive the share price higher. Investors would have greater confidence in the Marine business, as the operating environment improves. While drilling rig orders might lag oil price recovery, we could expect orders for production related facilities to flow through. Order wins in the Marine segment and land sales from Urban Development would bode well for SCI s share price. While the oil price rebound would be an early indicator, securing contract wins is a more tangible indicator. More momentum in land sales would signal more hope for growth, and be positive to share price A 2014A 2015F 2016F 2017F Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure S$m 1, , , A 2014A 2015F 2016F 2017F Capital Expenditure (-) 0.5 Widening spark spreads at Singapore power plants. Signs of a positive and widening spark spread in Singapore would alleviate a key concern of investors and provide support to the share price. Key Risks: Increasing competition in the Singapore power market. Total power generation supply in Singapore rose 9.3% y-o-y in 2014, marking the biggest y-o-y jump since the electricity market started heralds a similar growth in supply, depressing prices further and hurting SCI s bottom line. 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% ROE (%) 2013A 2014A 2015F 2016F 2017F Execution of Indian power plants. The availability of coal supply and power purchase agreements (PPA) for SCI s power plants in India have been of a concern. The first unit is up and running on a 500-MW purchase agreement and operating on both domestic and imported coal. Execution risk remains for the second unit, which was completed in Sept but has yet to win a PPA. Though, we believe it is in good position to secure a PPA soon. (x) Forward PE Band (x) +2sd: 15.5x +1sd: 13.9x Avg: 12.2x 1sd: 10.6x 2sd: 9x Company Background Sembcorp Industries (SCI) is a trusted provider of essential energy and water solutions to both industrial and municipal customers. It has facilities with 5,900 megawatts of gross power capacity and over eight million cubic metres of water per day in operation and under development. It is also a world leader in marine and offshore engineering (via Sembcorp Marine) as well as an established brand name in urban development (comprising industrial parks as well as business, commercial and residential space) in Vietnam, China and Indonesia. 5.5 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 PB Band (x) (x) sd: 2.54x +1sd: 2.13x 2.0 Avg: 1.72x 1.5 1sd: 1.3x 1.0 2sd: 0.89x 0.5 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Page 16

17 Sembcorp Industries Key Assumptions FY Dec 2013A 2014A 2015F 2016F 2017F Marine contract wins 4,193 4,192 3,150 2,500 3,000 Segmental Breakdown FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (S$m) Utilities 5,138 4,850 4,460 4,819 4,923 Marine 5,526 5,831 4,252 4,611 4,949 Industrial Parks Other Businesses and Corporate Total 10,798 10,895 8,885 9,572 9,989 Net Profit before EI (S$m) Utilities Marine Industrial Parks Other Businesses and Corporate (16.6) Total Net Profit before EI Margins (%) Utilities Marine Industrial Parks Other Businesses and Corporate (13.6) Total Income Statement (S$m) FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 10,798 10,895 8,885 9,572 9,989 Cost of Goods Sold (9,510) (9,480) (7,799) (8,346) (8,699) Gross Profit 1,287 1,415 1,086 1,226 1,290 Other Opng (Exp)/Inc (339) (352) (293) (325) (340) Operating Profit 948 1, Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (101) (50.7) (75.3) (76.6) (79.9) Exceptional Gain/(Loss) Pre-tax Profit 1,214 1,246 1, ,009 Tax (117) (162) (260) (177) (185) Minority Interest (277) (283) (114) (152) (152) Preference Dividend Net Profit Net Profit before Except EBITDA 1,619 1,612 1,312 1,383 1,454 Growth Revenue Gth (%) (18.4) EBITDA Gth (%) 4.6 (0.4) (18.6) Opg Profit Gth (%) (10.5) 12.0 (25.4) Net Profit Gth (Pre-ex) (%) 8.9 (2.4) (33.5) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Page 17

18 Sembcorp Industries Quarterly / Interim Income Statement (S$m) FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 3,069 2,664 2,338 2,388 2,399 Cost of Goods Sold (2,725) (2,241) (2,050) (2,035) (2,110) Gross Profit Other Oper. (Exp)/Inc (47.4) (63.3) (74.9) (102) (104) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (7.6) (37.0) (25.5) (50.1) (57.0) Exceptional Gain/(Loss) Pre-tax Profit Tax (52.4) (25.6) (40.5) (41.1) (10.9) Minority Interest (65.8) (92.1) (45.5) (49.6) (17.0) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) 21.1 (13.2) (12.2) EBITDA Gth (%) (35.9) 22.4 (33.3) Opg Profit Gth (%) (40.7) 17.6 (26.0) Net Profit Gth (Pre-ex) (%) (41.0) 18.9 (27.7) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (S$m) FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 5,127 7,725 8,395 9,048 9,683 Invts in Associates & JVs 1,852 2,074 2,155 2,180 2,208 Other LT Assets 1,086 1,246 1,246 1,246 1,246 Cash & ST Invts 2,257 1,663 2,636 2,394 2,694 Inventory 2,241 3,205 1,777 1,914 1,665 Debtors 1,140 1, ,055 1,101 Other Current Assets Total Assets 13,754 17,176 17,248 17,897 18,655 ST Debt 414 1,086 1,086 1,086 1,086 Creditor 2,692 2,745 2,239 2,412 2,517 Other Current Liab 1,796 1,526 1,339 1,320 1,368 LT Debt 1,485 3,649 3,649 3,649 3,649 Other LT Liabilities Shareholder s Equity 5,230 5,616 6,268 6,610 7,063 Minority Interests 1,300 1,616 1,730 1,882 2,034 Total Cap. & Liab. 13,754 17,176 17,248 17,897 18,655 Non-Cash Wkg. Capital (1,054) 198 (758) (699) (1,056) Net Cash/(Debt) 358 (3,071) (2,099) (2,341) (2,041) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH Net Debt/Equity ex MI (X) CASH Capex to Debt (%) Z-Score (X) Page 18

19 Sembcorp Industries Cash Flow Statement (S$m) FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 1,214 1,246 1, ,007 Dep. & Amort Tax Paid (125) (119) (258) (260) (177) Assoc. & JV Inc/(loss) (155) (158) (150) (95.7) (97.6) Chg in Wkg.Cap. 141 (1,414) Other Operating CF Net Operating CF 1,470 (57.4) 2, ,447 Capital Exp.(net) (1,164) (1,298) (1,000) (1,000) (1,000) Other Invts.(net) Invts in Assoc. & JV (284) (280) Div from Assoc & JV Other Investing CF (21.0) Net Investing CF (1,358) (1,441) (930) (930) (930) Div Paid (413) (539) (286) (288) (216) Chg in Gross Debt Capital Issues Other Financing CF , Net Financing CF (286) (288) (216) Currency Adjustments Chg in Cash 196 (594) 971 (243) 300 Opg CFPS (S cts) Free CFPS (S cts) 17.0 (76.0) 66.5 (1.4) 25.0 Target Price & Ratings History S$ S.No. Date Closing Price Target Price Rating 1: 18 Feb BUY 2: 08 May HOLD 3: 10 Aug BUY 4: 31 Aug BUY 5: 18 Sep BUY 6: 23 Sep BUY 7: 30 Oct BUY 8: 09 Dec BUY 9: 22 Jan BUY Jan-15 May-15 Sep-15 Jan-16 Note : Share price and Target price are adjusted for corporate actions. Source: DBS Bank Page 19

20 Singapore Company Guide Sembcorp Marine Version Bloomberg: SMM SP Reuters: SCMN.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Jan 2016 FULLY VALUED Last Traded Price: S$1.48 (STI : 2,545.61) Price Target : S$1.35 (8% downside) (Prev S$1.85) Potential Catalyst: O&G recovery, disposal of terminated rig at profit Where we differ: In line Analyst Pei Hwa Ho peihwa@dbs.com Janice CHUA janicechuast@dbs.com Price Relative S$ Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Sembcorp Marine (LHS) Relative STI INDEX (RHS) Relative Index Forecasts and Valuation FY Dec (S$m) 2014A 2015F 2016F 2017F Revenue 5,833 4,252 4,611 4,949 EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) 4.1 (58.7) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) 4 (59) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) nm nm EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (S cts): Other Broker Recs: B: 2 S: 15 H: 4 Source of all data: Company, DBS Bank, Bloomberg Finance L.P Rough sea ahead Reiterate FULLY VALUED on SMM with lower TP of S$1.35 based on a lower 0.9x P/BV (from 1.2x P/BV) in view of the deteriorating situation in Brazil and potential impairment / provision ahead. The new TP implies 10% potential downside. Stock prices have been driven up by speculation of potential privatization by SCI lately, which is unjustifiable in our opinion. We believe the more likely scenario could be the injection of Keppel O&M into SMM. While dividend yield seems attractive over 5%, there is downside risk given the rising pressure to conserve cash. We will revisit our assumptions after FY15 results reporting on 15 Feb. Rough sea ahead. We expect more deferments and cancellations to come. SMM has seen a number of deferments from customers Sete Brasil, Transocean, Oro Negro, Perisai, and the first cancellation by Marco Polo (MPM). The dispute with MPM will be a near-term drag and it appears challenging to dispose of the 95% completed terminated rig at good prices in the current environment. Meanwhile, the Brazilian saga remains an overhang with Sete Brasil s financing issue still unresolved. Slow order momentum. New contract wins of S$3.2bn in 2015 is commendable in the current climate, driven by the two sizeable contracts to build a fixed platform and the world s largest semi-submersible crane vessel. Nevertheless, current orderbook of S$11.6bn as at end-sep15 is set to decline in anticipation of sluggish order flow. We believe rig orders are unlikely to make a comeback anytime soon given the supply glut amidst oil crisis. Valuation: Our target price of S$1.35 is based on 0.9x SMM s FY16 P/BV, in anticipation of writedown ahead. This is also in line with AFC trough valuation. Key Risks to Our View: Key downside risks are sustained low oil prices which affect rig count and newbuilding activities, execution risks at protected markets especially Brazil and further deferments / cancellations. Upside risk could come from privatisation or M&A activities. At A Glance Issued Capital (m shrs) 2,088 Mkt. Cap (S$m/US$m) 3,081 / 2,159 Major Shareholders Sembcorp Industries Ltd (%) 61.0 Franklin Resources (%) 5.0 Free Float (%) m Avg. Daily Val (US$m) 4.2 ICB Industry : Oil & Gas / Oil Equipment; Services & Dist sa: YM

21 Sembcorp Marine New order wins (S$ m) CRITICAL DATA POINTS TO WATCH Earnings Drivers: Declining orderbook. Order wins and orderbook trend are often the key leading indicators of rigbuilders share price and earnings. Based on existing capacity, SMM requires S$4-5bn worth of order replenishment every year. We expect new orders to be 60% of those levels in the coming two years amidst sector headwinds, a harbinger of declining orderbook and earnings ahead. SMM s orderbook stood at S$11.6bn as of Sept-2015, of which approx. 45% comes from the drillship projects with Sete Brasil. While this translates into a book-to-bill ratio of over 2.5x based on existing delivery schedule, it is vulnerable to deferments and cancellations. Asset deflation underway. Post GFC, newbuild prices for drilling rigs tumbled 20-30% from The 5-15% price gain over the past few years could all be given back, if not worse. In this downturn, China plays a bigger role in global rig market, garnering one-third of global orderbook. Over 90% of these contracts are built on speculation without back-to-back charters and on 5:95 balloon payment terms, making it vulnerable to cancellations. We expect fire sales to suppress rig prices as shipyards would be desperate to recoup their construction costs if ship owners walk away. Rig utilisation and dayrates remain under pressure. Low oil price adds fuel to fire, aggravating the already challenging rigbuilding market that is suffering from a massive order backlog and keen competition. New rig supply is projected to be 5-7% a year while rig demand is expected to contract by 3-5% y-o-y in 2015, before returning to positive territory in As a result, day rates and utilisation have fallen around 20-30% from June 2014 levels. It may get worse before it gets better. We believe a gradual recovery in rig market towards end-2016 will set the stage for rising newbuild demand thereafter. 4,000 3,500 3,000 2,500 2,000 1,500 1, S$ m 5,000 4,000 3,000 2,000 1, ,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, S$ m 4,193 4,192 3,150 Sales Trend Asset Trend Profitability Trend 2,500 3, A 2014A 2015F 2016F 2017F 2013A 2014A 2015F 2016F 2017F S$ m Total Revenue Revenue Growth (%) (YoY) 2013A 2014A 2015F 2016F 2017F Net Fixed Assets (Tangible) 30.0% 20.0% 10.0% 0.0% Total Current Assets -10.0% -20.0% Pace of rigbuilding recovery is dependent on oil price rebound, retirement of old fleets and cancellations at Chinese yards. An oil price rebound above US$70/bbl will stimulate E&P activities and thus rig demand, while rig attribution and cancellations will soothe the supply pressure and eventually bring the sector back to equilibrium % 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2013A 2014A 2015F 2016F 2017F Operating EBIT Pre tax Profit Profit Net Margin Trends (%) 2013A 2014A 2015F 2016F 2017F EBITDA Margin % EBIT Margin % Net Income Margin % Page 21