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<Results Analysis> 3Q business update; Order momentum to pick up

  • Expect significant losses in 2H due to COVID disruption.
  • Orderbook running low at <1-year revenue coverage; Tendering and enquiries seem improving
  • Yard merger proposal progresses to due diligence stage; Valuation and potential dilution are key overhangs
  • Maintain HOLD; TP S$0.08

Expect significant losses in 2H due to COVID disruption. As guided in profit warning issued on 19-Oct, SMM expects to incur significant losses in 2H21, potentially similar to losses reported for 1H2021, which was S$647m. This is due largely to further delays and higher projected costs for outstanding projects, owing to work disruptions caused by COVID. On a positive note, situation is under control and yard operations is back to normal. 

Order wins. Order wins remain fairly low. YTD, the group secured ~S$600m new contracts – Sofia windfarm converter station (~S$350m for SMM’s scope of work based on our estimate) and P-71 FPSO (~S$230m). Orderbook dwindled to S$1.24bn (excl S$0.18bn repair and upgrades work), with 16 projects under execution (two to be delivered in 2021, 12 in 2022 and remaining two by 2025), less than desirable annual run rate of at least S$2bn.

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Improving tendering and enquiries. Market sentiment has improved vastly of late with rising oil prices and realisation of sector underinvestment could potentially lead to supply risk as energy crunch hits. SMM is actively tendering and working on projects >S$10bn. Potential project pipeline includes: 1) Siccar Point FPSO – progressed to pre-FID and anticipating FID soon; 2) Dorado FPSO currently conducting FEED; and 3) Brazil Navy – in negotiations to build an Antarctic support vessels (>S$500m). 

Yard merger proposal progresses to due diligence phase. While management could not share more details on negotiations and timeline, it has progressed well and still ongoing, conducting mutual due diligence at the moment. 

Maintain HOLD; TP S$0.08. Operationally, it appears that the worst is behind SMM with signs of sizeable contract awards coming through. Potential share dilutions resulted from yard mergers remain an overhang in our view.