• 2Q18 revenue exceeded our expectation but net profit missed due to loss on the sale of a semi-submersible.
• Gloomy guidance for 2H18 due to low work volume and operating loss.
• Recent orders are all from the Floaters segment and order book is decreasing.
• We maintain our rating REDUCE with a lower TP of S$1.78, based on FY18e BVPS of SG$1.1 and the 5-year average PBR of 1.6x. It is worth mentioning that the historical PBR low was around 1.0x.

Positives

+ Orders stem from floaters segment: In 2Q18, SMM was awarded of the Shell Vito floating production unit hull and living quarters contract and a first polar expedition cruise ship design contract. Together with a contract from TechnipFMC for the engineering, procurement, and construction (EPC) of hull and living quarters for a newbuild FPSO secured in 1Q18, the total value of new contracts locked in 1H18 arrived at S$730mn. In comparison, the total value of contracts from floaters segment was S$911mn in FY17. It is worth noting that all the contracts secured YTD were from floaters segment, indicating that the only floaters are benefitting from the rally of oil prices in the offshore market.  

Negatives

– Gloomy guidance on 2H18: Due to the prevailing challenging operating environment, management foresees that work volume remains low and margins remain compressed. Operating losses will continue for the rest of the current financial year. Meanwhile, it will take 2 to 4 quarters time for some EPC projects to recognise revenue after the main construction activities kick start.

– Orders book dwindling: The net order book continues to decline (1H18: S$7.2bn vs FY17 (restated): S$8.4bn). Floating LNG businesses still at the enquiry stage with no orders. Management expects to execute new and other potential orders smoothly.

Outlook

SMM is still struggling though oil prices recovered back to 3-yr high recently. At the juncture, oil majors remain cautious and prudent in raising capex on newbuild drilling facilities. Therefore, SMM continues to suffer from the stagnant order book. On the hand, management decided to move up the value chain, enabling the group to provide integrated solutions instead of purely construction and engineering services. To achieve it, the group will acquire more intellectual properties moving forward. We expect financials to turn around next year based on the orders.

Maintain REDUCE with a lower target price of S$1.78

We revised down our FY18e BVPS (from SG$1.3 to SG$1.1) due to protracted weak performance. Based on the 5-year average PBR of 1.6x, we derive an updated TP of S$1.78 for FY18. It is worth mentioning that the historical PBR low was around 1.0x. We maintain our REDUCE recommendation.

Figure 1: Net order book dropped to a 6-year low as of 2Q18

*Sete Brasil drillship contracts valued at SG$3.1bn
Source: Company, PSR

Figure 2: Increasing net gearing ratio

Source: Company, PSR