Singapore Yards Back on Track?

Singapore's two ship-repair yards, Keppel Hitachi Zosen Ltd. and SembCorp Marine Ltd., are expected to report modest profit growth after almost two years of restructuring and consolidation. Keppel Hitachi Zosen was expected to turn in profit of about S$33 million for 1999 after a S$65 million loss for the nine months ended December 1998, analysts said. SembCorp Marine, due to release results today (Feb. 14), should post a 10 percent rise in earnings of between S$78 million and S$80 million against 1998 profit of S$71.81 million. Squeezed by rising land and wage costs, Singapore's shipyard industry underwent a consolidation in 1997 and 1998 that saw the city state's main players reduced to two from four. SembCorp Marine was formed by a merger between Jurong and Sembawang Shipyards in mid-1997 while Keppel Shipyard and Hitachi Zosen (Singapore) completed their merger in 1999. Both yards have made some progress in reducing costs through retrenchments undertaken in November, when SembCorp Marine let go of 249 employees and Keppel Hitachi, 132. But analysts see choppy waters ahead for the industry as cheaper shipyards in the Middle East and China continue to prove keen competition through expanded capacity and lower prices. "Going forward things are looking a bit tough. It's an industry problem," Vickers Ballas analyst Janice Chua said. Sembcorp Marine Rated Buy Investors looking to sink their money into the shipyard industry would fare better with SembCorp Marine, analysts said. SembCorp Marine's valuation was cheaper, trading around 10 or 12 times earnings versus Keppel Hitachi Zosen's 20 times. "On valuation, SembCorp Marine is a lot cheaper, it's a better-run yard and they've just pulled out a rationalization plan. I think they're a lot more forward looking than Keppel," Chua said. SembCorp Marine's plan to move more of its shipyard operations offshore was also favored and the group's restructuring was expected to reap S$15 million in savings this year and S$30 million annually down the road. Chua Ser Miang of Kim Eng Securities estimated 2000 earnings at about S$93 million largely due to savings from restructuring. "It's not a big problem if you take pre-emptive measures now. They (shipyards) have to cut costs by moving some of their labor-intensive operations offshore," Elizabeth Cheng, analyst at ABN AMRO Asia Securities, said. Vickers' Chua, who had a buy recommendation on the stock, said SembCorp Marine needed to focus on higher value-added jobs in Singapore and outsource lower value contracts. Cheng said the group's prospects depended on the conversion market that was expected to pick up and made up nearly half the yard's turnover last year. Keppel Hitachi Seen Overvalued Keppel Hitachi had not fully reaped cost savings from its merger though some progress had been made through retrenchments. "We expect earnings to decline for year 2000, (but) 1999 should be O.K. because of the order book that was built up over the past two years," Vickers' Chua said. "They're living on the old order book, but going forward I think it's still quite lean," said Chua, who had a sell on the stock. Unlike SembCorp Marine, the bulk of Keppel Hitachi's turnover comes from ship-repair, and thus the yard would not benefit from a rebound in conversion activity, ABN AMRO's Cheng said.