Yangzijiang, Keppel Corp and SembMarine in UOB Kay Hian' s top picks in ' overweight' O& M sector

UOB Kay Hian analyst Adrian Loh has maintained &ldquo overweight&rdquo on the offshore and marine (O& M) sector as he sees the sector moving &ldquo onwards and upwards&rdquo .

&ldquo The rig market appears to have turned a corner in 2021 with oil prices exceeding US$80 ($107.50) per barrel &ndash this has resulted in stronger rig utilisation rates and a firming of rig dayrates vs 2020,&rdquo writes Loh in his Jan 14 report.

&ldquo The higher offshore activity expected in 2022 and 2023 underpins our positive view on the sector, especially given that meaningful rig supply was removed globally,&rdquo he adds.

In 2021, competitive utilisation for offshore rigs rose strongly, exceeding the highs seen pre-Covid-19.

&ldquo With the higher utilisation numbers, we believe that dayrate numbers should follow and incentivise rig owners to place new orders. Already we have seen firmer rig dayrates on a y-o-y basis. We also note that particular regions like Brazil saw utilisation rates exceed 90% in 2021,&rdquo says Loh.

Global offshore activity is also likely to pick up in 2022 and 2023, with demand for production assets looking to have &ldquo meaningful upside&rdquo in the next few years, which could be positive for Keppel Corporation and Sembcorp Marine.

&ldquo According to Rystad Energy, offshore investments in 2022 are set to increase by 7% y-o-y from US$145 billion to US$155 billion. In addition, we highlight that the US$150 billion of greenfield projects sanctioned in 2021 (2020: US$80 billion) will likely be repeated in 2022, thus underlining the positive outlook for the offshore marine sector in the short to medium term,&rdquo he adds.

To this end, should activity in the oil and gas industry strengthen in 2022 and 2023, Loh says the sector can expect to see a cyclical upturn start in the near term. This is also based on the assumption that governments are able to view the Covid-19 virus as endemic amid less lethal variants.

Finally, the global offshore rig count fell 7% y-o-y to 716 rigs. Around 42 rigs were sold for scrap or conversion with semi-subs registering the largest supply destruction in percentage terms, down 12% y-o-y to 104 rigs.

&ldquo In our view, this is positive for the industry as the extraction of excess supply should allow utilisation and dayrates to firm up going forward,&rdquo says Loh.

Within the sector, Loh has identified Yangzijiang, Keppel Corporation and Sembcorp Marine (SembMarine) as his top picks. Yangzijiang, which remains inexpensive at FY2022 P/B 0.6 times, will see margin expansion in the next few quarters. Keppel Corporation has undemanding valuations and has potential positive newsflow on its merger or divestment of its O& M business unit. SembMarine&rsquo s risk-reward is skewed to the upside after its successful $1.5 billion rights issue in 2021. The latter could also benefit from the upcoming upcycle as Singapore&rsquo s largest offshore marine company, says Loh.

UOB Kay Hian has given Yangzijiang, Keppel Corporation, SembMarine and Sembcorp Industries &ldquo buy&rdquo calls with target prices of $2, $6.74, 11 cents and $2.59 respectively.