Positives
+ S$175mn of new contracts secured in Feb-19. The new contracts of projects comprise the design and construction of a 12,000-cubic-metre LNG bunker vessel. It is the first newbuild of such a type of vessel for the group and repair and modernisation works on 13 cruise ships. The vessel is expected to be delivered in 2021.
Negatives
– Increasing gearing and declining cash. As of 1Q19, net gearing was 1.47, compared to 1.44 by the end of Dec-18. Cash in hand fell sharply to S$524.0mn (FY18: S$837.7mn) during the period. SMM expects to ultimately collect S$100mn related to the sale of West Rigel rig by Feb-20. Meanwhile, the group also expect the bulk of US$1.2bn related to the sale of jack-up rigs to Borr Drilling to be collected during FY22 to FY24. Hence, the group could face very tight liquidity this year. Capex for 1Q19 amounted to S$77mn, including the installation of new capabilities and completion of corporate headquarters at Tuas Boulevard Yard. Management believes capex in FY19 could be less than S$300mn which depends on both order flows and the current progress of the existing projects. Maintenance capex will be S$50mn to S$70mn.
– Dwindling net order book. The net order book continues to shrink (1Q19: S$5.8bn vs FY18: S$6.2bn). The progress on securing orders from floating LNG is still muted.
Outlook
Oil price (Brent) recovered from US$50/bbl back to US$75/bbl during 1Q19. Currently, it is trading marginally above US$70/bbl. The market consensus for the oil price in 2019 is in the range of US$60/bbl to US$80/bbl. Exploration and development spending from the major integrated oil companies is estimated to be US$221bn with an 18.8% YoY growth in 2019. SMM will continue to ride through the cycle with the improving market conditions. However, it could face the tightened liquidity issues in the near term due to the drawdown of cash and management is mindful with the working capital turnover.
Maintain NEUTRAL with an unchanged target price of S$1.76
We keep our FY19e BVPS at SG$1.1. Based on the unchanged 5-year average PBR of 1.6x, we maintain our TP at S$1.76. It is worth mentioning that the historical PBR low was around 1.0x. We maintain our recommendation NEUTRAL.
Guangzhi graduated from Singapore Management University with a Master degree in Applied Finance and from South China University of Technology with a Bachelor degree in Electronic Commerce.
The current sector coverages include Energy, Utilities, and Mining sectors. He has 3 years experience in equity research in both Hong Kong and Singapore market. He is the mandarin spokesperson for Phillip Securities Research in relation to China-related projects and all mandarin seminars and client events.
