Expect more upside surprises for results in 2Q09, vs. 1Q09. The charter rates and steel plate prices have hovered at favorable levels, vs. our forecast assumptions.

Upside risk to margin performance in 2Q09. There could be upside surprise to the margins for Yangzijiang, due to the lower steel plate prices (vs. 2007), and Keppel Corp (KEP) benefiting from unexpectedly strong property sales in 2Q09. We expect the offshore support service providers to follow the footsteps of Ezra’s recent 3Q09 results, with margins to be in-line/above our expectation. This is consistent with our sector report (dated 31 March 2009) for steadier vessel charter/utilisation rates in 2Q09.

Rig builders’ 2Q09 results may yield different conclusions. A better-than-expected rigbuilding margin could spring 2Q09 earnings surprise. However, we caution that any earnings out performance due to higher offshore order book recognition could ring alarm bells. Coupled with weak y-t-d order book replenishment (S$0.3b for KEP and S$1b for Sembcorp Marine), the lower order books would imply weaker margins/earnings in FY10 as negative operating leverage sets in.

Swiber Holdings is our bellwether stock for order flows. Swiber is the SGX-listed company most likely to benefit from higher oil prices, due to its focus on downstream offshore field development activities. Swiber’s outlook for its contract award season (Jun-Aug) in South Asia is seen as a harbinger for order flows in other parts of the sector, as credit crunch and high supply chain costs could still undermine higher oil prices.

Our top stock picks. There are still upside potential to our top picks’ target prices (TP), at 16% for Sembcorp Marine, 23% for Ezra Holdings, and 40% for Mermaid Maritime. We have also upgraded KEP’s TP to S$6.34, but our call on the stock remains FULLY VALUED.