Kim Eng on 13 Feb 2014
4Q traditionally stronger. We forecast FY13E net profit of SGD546m (+1% YoY) on revenue of SGD5,488m (+24% YoY). The fourth quarter is traditionally a strong quarter for SMM as repair and offshore variation orders wrap up by year-end. We expect operating margins to climb higher to 12.0% in 4Q13 (3Q13: 10.1%, 4Q12: 10.8%), which would translate to full-year operating margin of 11.9%.
Full-quarter contribution from Integrated New Yard Facility. 4Q13 would see a full-quarter contribution from SMM’s Integrated New Yard Facility at Tuas, which started operations last August. While a full ramp-up by end-4Q13 is unlikely, we see it as a good gauge of the pace of buildup to ensure a better estimate of FY14 potential. This is important as we expect higher ship repair volume to mitigate lower margins from drillship contracts.
Revenue recognition for second drillship. The second Sete Brasil drillship is expected to reach initial revenue recognition in either 4Q13 or 1Q14. We have assumed recognition in 4Q13. If this does not materialise, 4Q13E revenue would be lower and margins could exceed our forecasts. What to watch out for. Two key data points to monitor in SMM’s upcoming results are (1) ship repair volume and (2) operating margins. The numbers would validate our investment thesis that the market has been overly pessimistic on its margins.
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