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SECTOR UPDATE

MARKET WEIGHT

Offshore & Marine – Singapore

(Maintained)

A Turning Point For The Oily Mess In Brazil? The latest newswire reports suggest a possible turning point in Brazil. Sete Brasil's restructuring plan has received shareholders’ approval. Its rig-building programme will most likely be reduced from 29 to 15 units. Orders with Keppel and SMM appear to be fully maintained. Sete Brasil showed plans to renegotiate up to US$4.5b of debt, including US$1.2b in late payments owed to shipyards. Our top stock picks remain SCI, Ezion Holdings and Triyards. Maintain MARKET WEIGHT. WHAT’S NEW • A turning point for the oily mess in Brazil? Upstream and Brazilian news Valor Econômico have reported that Sete Brasil's restructuring plan - presented last Thursday – has received shareholders’ approval. Details are not yet public. Reports indicate that Sete Brasil’s rig building programme will most likely be reduced from 29 to 15 units. Orders with Keppel Corp (Keppel) and Sembcorp Marine (SMM) will be fully maintained. Sete Brasil showed plans to renegotiate up to US$4.5b of debt, including US$1.2b in late payments owed to shipyards. These plans have yet to be presented to creditors. Details are sketchy, but Banco de Brasil (Brazil’s largest state-owned bank) and Caixa Econômico Federal (Brazil’s second-largest state-owned bank) are expected to grant additional funding. Valor Econômico further stated that China Development Bank and Japan Bank for International Cooperation might step in for financing. • Shipyards have slowed rig construction. This is evidenced from the schedules of percentage completions released by Sete Brasil. Between Dec 14 and Mar 15, three of the five yards (BrasFELS, Jurong, Enseada, EAS and ERG) building rigs for Sete Brasil have slowed their construction to a trickle. During this period, Keppel and Enseada were still actively building their rigs. Keppel completed 6.5%, 7.6% and 4.3% of three semisubmersible rigs (the Frade, Bracuhy and Portogalo semis) while Enseada completed 13.6% and 7.6% of two rigs (Ondina and Pituba drillships) respectively. SMM’s Jurong Shipyard Aracruz in Brazil has slowed its rig building. • Brazil is a sizeable earnings contributor to SMM. A quarter of our projected 2016 net profit is from its drillships for Sete Brasil while a smaller 9% of Keppel’s projected 2016 earnings are from Brazil. More importantly, SMM has invested about S$1b on its new yard in Brazil. A solution to Sete Brasil’s financial gridlock would be a major positive for both the Singapore rig builders. • In the meantime, the global oil & gas industry is still headed south. Thus far ytd, Keppel has won only S$500m (2014: S$5.5b, 2013: S$7.0b, 2012: S$9.9b) of new contracts. SMM has won only one contract of S$56m (2014: S$4.2b, 2013: S$4.0b, 2012: S$11.0b), but it has secured a Letter of Intent (LOI) to build a crane vessel (that will be the largest in the world) for Dutch heavy-lift specialist Heerema Marine Contractors. According to Upstream, industry sources have estimated the total cost at “upwards of US$1b”. SMM expects to firm up the contract for this vessel in 2015.

SECTOR PICKS Company

Rec

Target Price (S$)

Share Price (S$)

SCI

BUY

5.10

4.16

Ezion Holdings

BUY

1.52

1.13

Triyards Holdings

BUY

1.05

0.48

Source: UOB Kay Hian

OIL CAPEX REDUCTION BY GROUP -

0%

(1.0)

-10%

(2.0)

-20%

(3.0)

-30%

(4.0)

-40%

(5.0)

-50% NOC

Major

Large Mid/Small Cap Cap

Capex Reduction (US$b)

yoy % Chg

Source: Various, UOB Kay Hian

OIL CAPEX SIZE BY GROUP Large Cap 9%

Mid/Small Cap 5% NOC 47%

Major 39%

Source: Various, UOB Kay Hian

SETE BRASIL’S RIGS – COMPLETION SCHEDULE Rig Name Arpoador Copacabana Urca Guarapari Ondina Cassino Grumari Frade Camburi Pituba Ipanema Bracuhy Itaoca Curumim Leblon Portogalo Mangaratiba

Yard Jurong EAS BrasFELS Jurong Enseada ERG2 EAS BrasFELS Jurong Enseada EAS BrasFELS Jurong ERG2 EAS BrasFELS BrasFELS

Del. May-15 Mar-16 Jul-16 Jul-16 Aug-16 Aug-16 Nov-16 May-17 May-17 Jun-17 Jul-17 Jan-18 Jan-18 Feb-18 Mar-18 Sep-18 May-19

------- % Completion -----Dec 14 Mar 15 81.2 81.5 48.1 49.2 86.5 87.7 58.8 61.8 54.2 67.8 50.2 52.2 38.0 38.1 53.1 59.6 34.8 35.7 17.7 24.8 23.2 23.4 25.2 32.7 16.1 16.3 13.2 13.9 13.8 14.0 6.3 10.5 3.7 3.7

% chg 0.3 1.1 1.2 3.0 13.6 2.1 0.1 6.4 0.9 7.1 0.2 7.6 0.2 0.7 0.2 4.3 0.0

ANALYSTS Nancy Wei +65 6590 6628 [email protected] Foo Zhiwei +65 6590 6626 [email protected]

Source: Sete Brasil

Refer to last page for important disclosures.

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ACTION • A major positive. A turning point in the Brazilian saga would be a major positive for Keppel and SMM. However, both groups still need to ride through the current downturn of the global O&G industry. Our top stock picks in the Singapore offshore & marine (O&M) sector remain Sembcorp Industries (SCI), Ezion and Triyards. ASSUMPTION CHANGES / CATALYSTS / RISKS • Maintain stock recommendations. Our target price revisions using a 1-year forward P/B methodology are shown below. The key risks in the entire sector are: a) protracted low oil prices, and b) another fall in oil prices. Both could cause oil companies to have another round of spending cuts. KEPPEL, SMM, SCI & COSCO – SENSITIVITY OF VALUATIONS TO BRENT CRUDE OIL PRICE Brent Oil Price (US$/bbl) 120 110 100 90 80 70 60 50 40 30 Base Case

Estimated 1-Yr Forward PB (x) 2.5 2.5 2.5 2.4 2.3 2.1 2.0 1.8 1.1 1.1 2.1

Valuation (S$/share) Keppel O&M 4.40 4.40 4.40 4.23 4.05 3.70 3.52 3.17 1.94 1.94 3.70

Keppel Property 4.01 4.01 4.01 4.01 4.01 4.01 4.01 4.01 4.01 4.01 4.01

Keppel Others 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99

Keppel SOTP 9.40 9.40 9.40 9.23 9.05 8.70 8.52 8.17 6.94 6.94 8.70

SMM1 3.48 3.48 3.48 3.34 3.20 2.92 2.78 2.50 1.53 1.53 2.92

SCI O&M 2.46 2.46 2.46 2.36 2.26 2.06 1.96 1.77 1.08 1.08 2.06

SCI NonO&M 3.04 3.04 3.04 3.04 3.04 3.04 3.04 3.04 3.04 3.04 3.04

SCI SOTP 5.50 5.50 5.50 5.40 5.30 5.10 5.00 4.81 4.12 4.12 5.10

COSCO (S)2 0.46 0.46 0.46 0.44 0.42 0.39 0.37 0.33 0.20 0.20 0.39

Discounted 15% for the risk in Brazil Discounted 70% for the negative business outlook Source: UOB Kay Hian 1

2:

STOCK RECOMMENDATIONS Company

Rec

Trading Curr (lcy)

Price @ 19 May 15 (lcy)

Target Price (lcy)

Market Cap (US$m)

PE 2015F (x)

P/B 2015F (x)

EV/EBITDA 2015F (x)

ROE 2015F (%)

Net Gearing (%)

COS SP KEP SP SCI SP SMM SP

SELL HOLD BUY HOLD

S$ S$ S$ S$

0.53 8.83 4.16 3.00

0.39 8.70 5.10 2.92

892 12,020 5,575 4,707

86.2 10.6 9.7 12.2 29.7

0.9 1.5 1.3 2.0 1.4

14.5 12.2 8.7 9.5 11.2

1.0 14.2 13.3 16.6 11.3

161.3 36.6 50.8 27.6 69.1

EZI SP EZRA SP NCL SP ETL SP PACRA SP

BUY HOLD SELL BUY BUY

S$ S$ S$ S$ S$

1.13 0.41 0.31 0.48 0.63

1.52 0.54 0.28 1.05 0.99

1,340 312 488 117 343

6.2 7.5 7.9 4.1 8.6 6.9

0.9 0.3 1.3 0.5 0.7 0.7

7.2 10.7 8.2 4.2 8.3 7.7

16.0 3.5 17.3 14.7 8.9 12.1

114.0 114.3 41.8 41.2 52.5 72.7

Ticker

Rig Builders COSCO Corp Keppel Corp Sembcorp Ind Sembcorp Marine Average Small/Mid-Caps Ezion Ezra Nam Cheong Triyards Pacific Radiance Average Source: Bloomberg, UOB Kay Hian

OIL SERVICES SECTOR P/B

SMM P/B (BENCHMARK FOR RIG BUILDERS)

(x) 5 4 4 3 3

(US$) 160 Brent Oil Price

+2SD +1SD

2

Mean

2 1 1 0 2004

-1SD 2006

1-yr Fwd P/B (LHS) 2008

2010

2012

2014

Source: Datastream, UOB Kay Hian

Refer to last page for important disclosures.

(x) 8

(US$) 160

Sembcorp Marine

140

7

120

6

100

5

+1SD

80

4

Mean

60

3

40

2

20

1

0

0 2003

140

Brent Oil Price

+2SD

120 100 80

-1SD

60

1-Yr Fwd P/B (LHS)

40 20 2005

2007

2009

2011

2013

2015

Source: Datastream, UOB Kay Hian

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BRAZIL – OPERATION LAVA JATO (“CAR WASH”) Date

Event

17-Mar-14

Brazil's Federal Police initiate Operation Lava Jato ("Car Wash")

20-Mar-14

Paulo Roberto Costa, former Petrobras downstream director is arrested on suspicion of black market money laundering

25-Mar-14

Paulo Roberta Costa is accused of receiving kickbacks on a construction contract for Petrobras' Abreu e Lima Oil Refinery

11-Apr-14

Federal Police extend investigation into suspicious deals involving Petrobras. The headquarters in Rio is searched.

15-Apr-14

Alberto Youssef, a money dealer involved in the operation, is indicted with Costa and 44 others.

16-May-14

Standard & Poor reaffirms Petrobras with a BBB- rating; maintains stable outlook.

10-Jun-14

Costa testifies before a Parliamentary Inquiry Commission. He denies corruption in Petrobras, saying: "I deny with vehemence that Petrobras was a criminal organization. It was not a business desk. There is no money laundering in Petrobras."

9-Aug-14

Youssef's accountant testifies that companies paid for consulting services offered by his firm knew they were fraudulent.

6-Sep-14

Costa testifies in court, stating that 12 senators, 49 federal deputies and at least one governor received embezzled money from Petrobras.

21-Oct-14

Moody revises risk rating on foreign and local currency debt from Baa1 to Baa2. Keeps Investment Grade.

31-Oct-14

BNDES signals its unwillingness to further finance Sete Brasil, which needs to roll US$650m of bridging loans in Nov and is about to run out of cash.

11-Nov-14

Pedro Barusco, former Petrobras manager, agrees to return US$100m in a deal to avoid detention

13-Nov-14

Petrobras announces a delay in releasing its 3Q14 financial results, citing further clarification needed on details that will impact its financial results. Sets new 12 Dec 14 deadline.

14-Nov-14

Renato Duque, Petrobras' ex-engineering and services director is arrested on involvement with the money laundering scheme.

9-Dec-14

Petrobras receives a class action lawsuit from Peter Kaltman. His allegations cite harm from Petrobras corruption charges, causing losses on Petrobras' ADRs.

12-Dec-14

Delays 3Q14 results release. Postpones to 31 Jan 2015.

29-Dec-14

Announces intention to release of 3Q14 results without external auditor PwC's sign-off in Jan 2015.

14-Jan-15

Announces presentation of unaudited 3Q14 results to Board of Directors on 27 Jan 2015, with possible release to public on the same day.

27-Jan-15

Releases unaudited 3Q14 financial statements. Auditor PwC refuses to sign-off on the accounts.

30-Jan-15

Moody downgrades Petrobras' foreign currency debt from Baa2 to Baa3, keeps company 'under review'. Maintains investment grade.

4-Feb-15

Fitch downgrades Petrobras from BBB to BBB-, keeps company on 'negative watch'. Maintains investment grade.

4-Feb-15

President Graça Foster resigns, together with five other directors: Almir Guilherme Barbassa, CFO and Investor Relations, José Miranda Formigli, Director of Exploration and Production, José Carlos Cosenza, Director of Supply, José Alcides Santoro, Gas and Energy Director and Jose Antonio de Figueiredo, Director of Engineering, Technology and Materials.

6-Feb-15

Aldemir Bendine is elected as the new President of Petrobras

6-Feb-15

Upstream reports that BNDES has postponed a US$3.2b credit facility following press reports that Sete Brasil was involved in corruption.

9-Feb-15

KEP and SMM are alleged by Pedro Barusco to be paying bribes for contracts. Both yards reject the allegation.

11-Feb-15

Petrobras announces intention to review its business plans and cut investments.

16-Feb-15

Rolls-Royce is alleged by Pedro Barusco to have paid him US$200,000 via an agent in exchange for a US$100m contract. Rolls-Royce rejects allegation.

24-Feb-15

Moody further revises Petrobras' foreign currency debt rating from Baa3 to Ba2. No longer investment grade.

27-Feb-15

Estaleiro Atlantico Sul (EAS) withdraws 7 units from the 29-rigs Sete Brasil project due to no payment since Nov-14

13-Mar-15

Yards enter their 5th month without payment from Sete Brasil

16-Mar-15

Petrobras is removed from the Dow Jones Sustainability Index World, which it was part of since 2006.

16-Mar-15

Prosecutors charge 27 people in the Petrobras scandal, including João Vaccari Neto, treasurer of the Workers' Party and Renato Duque, former head of services of Petrobras

20-Mar-15

Standard Chartered files formal request for an early repayment of loan, worth between US$200-US$300m

27-Mar-15

Petrobras announces its AGM to be held on 29 April 2015.

27-Mar-15

Odfjell Drilling reportedly seeks termination of Brazilian JV with Galvao Oil & Gas due to a possible link to the corruption scandal.

27-Mar-15

BNDES makes clear it is no longer interested in taking the anchoring role in a US$25b financing programme for Sete Brasil's 29 rig programme.

30-Mar-15

SMM issues a statement that an agent alleged by Pedro Barusco was connected to the subsidiaries of its drillship contracts was arrested. No further comments were made pending further investigation.

1-Apr-15

Announces a US$3.5b loan facility with China Development Bank, to be implemented during 2015 and 2016.

10-Apr-15

Federal Police extend their investigation beyond Petrobras to state lender Caixa Economica Federal (CEF) and Federal Health Ministry

10-Apr-15

Upstream reports that Sete Brasil stakeholders were mulling over a potential full cancellation of the 29-rig programme, with preference for a reduction to 13 rigs. KEP and SMM are favored to stay on in the project.

22-Apr-15

Petrobras announces its 4Q14 results, together with the audited 3Q14 results. Posted a net loss of US$9.7b and US$2.2b for 4Q14 and 3Q14 respectively. Writeoffs relating to overpayments incorrectly capitalized (owing to Lava Jato) was US$2.5b.

24-Apr-15

Announces board to meet on May 15 to discuss 1Q15 results.

7-May-15

13th Federal Court of San Paulo grant a class action injunction against Sete Brasil, temporarily suspending contracts between Petrobras and Sete Brasil. Release of BNDES funding or any other type of credit is prohibited.

12-May-15

R$157m (c.US$52m) is recovered by federal prosecutors from Operation Lava Jato.

14-May-15

Sete Brasil presents restructuring plan, which receives overwhelming shareholders' approval. Rig programme to be reduced from 29 to 15.

18-May-15

Announces 1Q15 results, posting net income of R$5.3b (US$1.8b)

Source: Various sources

Refer to last page for important disclosures.

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UOBKH is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution by UOBKH (whether directly or through its US registered broker dealer affiliate named below) to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). All US persons that

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