Positives
+ Transocean requested the resumption of awarded contract works: The contract was for two drillship orders, and the delivery window is stretched to 2020.
+ Expenditures cut to maintain business: SMM decided to have further curbs on operating expenditure (Opex) in FY17. One of the measures to trim Opex is to freeze the wage across the board for all employees as well as to cut the 10% monthly variable component wage for senior management staff. In terms of capital expenditure (Capex), the Group generated S$98mn outflows in 1H17, compared to S$190mn in 1H16. It is expected to have S$50mn+ Capex for the remaining projects on the yard in 2H17. Moving forward, the Capex excluding the maintenance outflows will decline.
Negatives
– No replenishment to order book: In 1H17, SMM secured only S$75mn worth of new contracts excluding repairs, compared to S$320mn in FY16. The net order book continued to shrink, arriving at S$6.7bn YTD, of which S$3.1bn is associated with Sete Brasil drillship contracts. There is no detailed update on current status of these projects. Nonetheless, Management expects the total amount of new contracts in FY17 to surpass that of FY16.
– Though the group had some enquiries for floating LNG projects earlier on this year, the progress in clinching orders had been slow so far.
Outlook
SMM’s cost cutting measures will enable the Group to alleviate the pressure from the weak operating environment in the near term. However, we believe it will take time for the group to replenish the order book as well as get more work flows coming in. The weak performance may continue into 2H17.
Downgrade to REDUCE with lower target price of S$1.55
We revise down the FY17e EPS from previous 6.6 SG cents to 5.4 SG cents, due to weaker than expected performance in 1H17. Based on updated blended forward 12-month PER of 28.5x, we derive an updated TP of S$1.55 (previous TP: S$1.58). This implies a downside of 8.6% from the last done price of S$1.695, and we downgrade our call from NEUTRAL to REDUCE.
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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.