YZJ first jackup rig contract

YZJ made two announcements:

(1) a US$170m contract for a LeTourneau Super 116E jackup rig with an option for one additional unit; and
(2) a Letter of Intent (LOI) for the engineering and construction of a SSP unit.

We are neutral on the news. The rig contract is not a surprise as management guided that they are looking to close two jackup orders by end of the year. While the jackup order should generate some excitement for the stock, and the shipyard could experience a steep learning curve as this will be YZJ’s first rig project. Moreover, the price of the jackup appears on the low end of recent orders for similar design rigs and we believe margins may not be attractive. On the LOI, the risk lies in the execution of the SSP design, which will be the first such unit in the world. Maintain Neutral with an unchanged TP of S$0.95.

First jackup rig contract was within expectation. YZJ’s 78% owned subsidiary, Jiangsu Yangzijiang Offshore Engineering Co (JYOEC), has secured a
US$170m contract to build a LeTourneau Super 116E jackup rig for Mena Offshore Investments Limited with an option for one identical unit. The first rig is expected to be delivered by 2Q2015. The rig will be able to operate in a water depth of 350 feet and drilling depth of 30,000 feet. Pricing of the unit is similar to a LeTourneau Super 116E order won by Cosco Dalian in Aug 2012 (awarded by Talland Navigation) but significantly lower than the US$227m order secured by Lamprell for a similar unit in May 2012.

Higher execution risk for SSP unit: Separately, YZJ also announced that JYOEC has entered into a Letter of Intent (LOI) with SSP Asia, a unit of SSP Offshore, to start detailed design and construction engineering for a SSP unit, a form of FPSO. No contract value was disclosed. SSP Offshore is listed on the Canadian TSX Venture Exchange and is based in Houston, Texas.

Valuation: Neutral; TP maintained at S$0.95. Our TP is based on 8x FY13F shipbuilding earnings and adjust for net cash. The stock is now trading at 6.3x FY13F P/E and 1.0x P/B. We expect YZJ to register FY11-14F EPS CAGR of -20%.