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Merger hope

  • SMM shared in the 3Q21 call that it hopes to conclude the due diligence to merge with Keppel O&M “sooner than later”. We expect finalization by 1Q22.
  • Orders under tender exceed S$10bn and SMM hopes to secure better order wins in 2022. We estimate YTD win of S$650m and order book of S$1.42bn.
  • But SMM guided for continued significant losses in 2H21 (potentially as much as 1H21: S$647m) due to Covid-19 issues and supply chain constraints.
  • Our Hold call is premised on Temasek’s support and the potential combined entity with Keppel O&M. Our TP of S$0.09 is based on 0.8x CY22F P/BV.
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Hope for more orders in 2022

In 3Q21, SMM entered into exclusive Front-End Engineering and Design (FEED) contracts with Siccar Point Energy to deliver an FPSO design solutions for Cambo field. It also secured FEED contract for Santos Dorado FPSO. If awarded for the FPSO EPC contracts, we believe that SMM could reap above US$1bn each. Management shared that the group is bidding for more than S$10bn of projects. This includes the Brazilian Navy Antarctic Suppport Vessel (NApAnt) which will be finalised in 1H22. According to the Brazilian newswire, Jurong Aracruz/Sembcorp Marine Specialised Shipbuilding were selected as the builder for 2025 delivery. The contract size is likely to be significant as it should reportedly generate 500-600 direct jobs and 6,000 indirect jobs. We have penciled in S$2bn of orders for FY22.

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Manpower under control post 3Q21 but big losses in 2H21

SMM expects significant losses in 2H21 and guided for the potential range of losses to be similar to that of 1H21 (S$647m). It expects more delays and increase in project costs to complete projects over the next three to nine months. SMM blamed the delays on equipment delivery due to border closure in some countries, longer lead time due to supply chain constraints, labour shortages and work disruptions due to intermittent stop work orders due to spike in Covid-19 cases during 3Q21. As a result, five out of 16 projects under execution have been further delayed by 1-3 months, hence further cost overrun is expected. Post 3Q21, the Covid-19 cases in the yard have reduced significantly with manpower situation under better control qoq.

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Hold with unchanged TP of S$0.09, no cash call in 2022

We cut our FY21F-22F EPS by 3-25% to reflect more cost overruns but up FY23F EPS by 46% on higher revenue from higher orders in 2022. We peg SMM at 0.8x CY22F P/BV (20% discount to 3-year historical average of 1x). We see scope for narrower discount on consistent order win momentum, earnings recovery or clear strategy from enlarged entity with KEP O&M. The indicative order book for both yards could reach S$6.9bn based on 9M21 reported figures. Management shared that there is no need for further cash call in 2022 with the recent S$1.5bn rights issuance, although it remained non-committal beyond 2022. Key downside risks: cancellation of projects, sustained cost overruns.