• 1Q17 revenue exceeded our expectation but net profit missed. On Jan-18, SMM adopted Singapore Financial Reporting Standards (International) 15 (SFRS 15). Excluding the effects of SFRS 15, revenue would have only increased by 15% YoY, and a net loss reported.
• Order flow, profitability and guidance is still weak.
• We maintain our rating REDUCE with a lower TP of S$1.85, based on FY18e EPS of 3.6 SG cents and a blended 12-month forward PER of 51.4x.

Positives

+ A new contract replenished net order book in 1Q18: SMM secured a contract to undertake the engineering, procurement, and construction of hull and living quarters for a newbuild FPSO in Mar-18. The contract was valued at S$476mn. With this, the net order book arrived at S$7.7bn (S$3.13bn from Sete Brasil drillship contracts).

Negatives

– Warning on profitability: The adoption of SFRS 15 boosted the top line by 43.3% YoY in 1Q18. However, pre-SFRS 15, revenue growth would have been 15% YoY that translates into a S$33mn net loss in 1Q18. Under SFRS 15, revenue will be recognised upon completion of the contract instead of progressive recognition.

– Orders book dwindling: The net order book continues to decline (1Q18: S$7.7bn vs FY17 (restated): S$8.4bn). Management guided that low new orders and work volume may persist in the foreseeable quarters. Hence, the operating losses began in 4Q17 will continue. Floating LNG businesses still at the enquiry stage with no orders.

Outlook

Oil prices were on the course of recovery in 1Q18. However, the upstream drilling and production sector remained soft, as day rates and utilisation were relatively low. The drilling vessel market remains oversupplied. It will take several more quarters for the market to resume large capex on exploration and production. We have factored in new orders of S$2.5bn for SMM in FY18 (FY17: S$2.7bn).  

Maintain REDUCE with a lower target price of S$1.85

We revised down our FY18e EPS (from 4.4 SG cents to 3.6 SG cents) due to protracted weak performance and adoption of SFRS 15. Based on FY18e EPS of 3.6 SG cents and blended forward 12-month PER of 51.4x, we derive an updated TP of S$1.85 for FY18. We maintain our REDUCE recommendation.