- 3Q14 PATMI of SGD132.0m missed on weaker margins and flat ship-repair revenue. Management expects ship repair to jump in 4Q14.
- Cut FY14E-16E EPS by 2-8% for lower margins.
- Maintain HOLD & SGD3.80 TP (0.71x FY15E EV/backlog).
3Q14 PATMI of SGD132.0m, up 1.8% YoY and 0.3% QoQ, disappointed on lower margins and muted ship-repair revenue. 9M14 PATMI of SGD386.1m rose 3.4% YoY to form 67% of our FY14E and 68% of the market’s. Operating margins dipped to 10.0% (2Q14: 11.5%, 3Q13: 10.1%). This was traced to conservative recognition during the procurement phase of two Sete Brazil drillships. Repair revenue was flat at SGD157m (2Q14: SGD150m, 3Q13: SGD204m). Although management guides for a jump in 4Q14 from three large projects, one of which is worth at least SGD35m, this should just be a one-time boost, in our view.
Lack of catalysts; Maintain HOLD
SMM assuaged concerns on Brazil risks by reaffirming the on-schedule delivery of its first drillship. It also quashed news that Petrobras may reassign its FPSO topside contracts to another yard, alluding to its ongoing work on these projects. Ultimately, it needs to deliver on margins to address this overhang.
SMM was surprisingly optimistic on its order outlook, citing strong enquiries, especially for production assets. It also said its enlarged Tuas yard would allow it to capture those orders. YTD order intake of SGD4.2b formed 95% of our full-year forecast with a net order book of SGD12.6b. While we concur with its outlook for production assets, we see risks to overall 2015 orders, especially for rigs.
We cut FY14E-16E EPS by 2-8% for lower margins. Maintain HOLD and SGD3.80 TP, at 0.71x FY15E EV/backlog. This is 0.5 SD below its 10-year mean of 0.90x.
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