Uphill battle
- SMM’s 2Q15 profit was 15% below our and consensus estimates due to lower revenue, higher interest costs and losses from Cosco.
- As a result, 1H15 earnings were at 44% of our FY15 forecast.
- SMM declared a lower interim DPS of S$0.04 (1H14: S$0.05).
- We cut our FY15-16 EPS forecasts by 9-19% but raise FY17 EPS by 9% as we push forward some revenue recognition.
- This reduces our target price, still based on 11x CY16 P/E.
- Order book stood at S$10.9bn, with YTD win of S$1.35bn.
- SMM faces several headwinds:
- low yard utilisation in Brazil and Singapore,
- higher net gearing to finance working capital of projects with delayed delivery/ payment, and
- potential order cancellations.
- We maintain our Reduce call.
- TP: S$2.40 (prev S$2.52)
Rig building revenue could trend lower
- Higher qoq EBIT margin of 12% was the only positive from SMM’s 2Q15 results, thanks to higher ship repair revenue. But this may also be short-lived as repair volumes tend to be lumpy.
- 2Q15 rig building revenue shrank 17% qoq and 29% yoy to S$623m, contributing only 51% to total revenue (FY14: 64%).
- Semi-submersible revenue plunged 57% qoq with no major delivery in 2Q15 and significant depletion of order backlog.
- Only three projects remain – Helix semi-well intervention, Seadrill’s CS60 and Prosafe semi accommodation rig.
- We expect rig-building revenue to be lower in 2H15 as we believe SMM is in discussion with ‘a handful’ of jack-up rig customers –including Mexican Oreo Negro (3 rigs), Perisai Petrolem (1) and Marco Polo (1)– to delay delivery, which could push revenue recognition to the right.
- The possibility of zero jack-up rig delivery in 2H15 is high.
Same story for Sete Brasil
- SMM recognised S$232m of drillship revenue, slightly higher than 1Q15’s S$216m. Sete Brasil projects are still cashflow positive.
- SMM will scale down construction or stop work if the project cashflow buffer is exhausted.
Capex and working capital led to higher net gearing
- Net gearing rose to 0.5x from 0.2x in 2014, mainly to finance the Brazilian and Singapore yards (phase 1 & 2). SMM has spent S$776m on these two yards in 1H15 (S$2.8bn since 2010).
- Depreciation had only begun for Singapore phase 1 (S$900m). Capex should taper off in 2016 but SMM could remain in net gearing position given the delayed payments and delivery rescheduling by Sete Brasil and others.
(LIM Siew Khee)
Source: http://research.itradecimb.com/
