The worst is probably over
? SMM reported a loss of S$523m for 2H21, vs. our forecast of S$625m but in line with previous guidance. Gross loss narrowed 48% hoh to S$137m.
? The worst could be over for SMM with easing labour shortage, more projects due for delivery and improving order outlook (expect some by 1H22).
? With that, SMM guided for its financial performance in FY22 to be significantly better than in FY21. Order book stood at S$1.3bn at end-2021.
? Reiterate Hold premised on Temasek’s support and the potential combined entity with Keppel O&M (by 1Q22). TP stays at S$0.09 (0.8x CY22F P/BV).
Losses narrowed hoh
SMM’s 2H21 net loss of S$523m was narrower than our forecast of S$625m but in line with previous management guidance (continued significant losses in 2H21). FY21 net loss amounted to S$1.17bn vs. our forecast of S$1.27bn. The losses were mainly due to S$839m of post-tax provisions which comprised S$696m for additional labour and costs to complete projects, S$75m yard reinstatement costs and S$68m asset impairment & project stock write-down. Excluding these provisions, SMM’s 2H21/FY21F net loss would have been S$156m/S$332m. Net gearing stood at 0.5x at end-21.
Probably last round of major provisions, labour shortage eases
2H21 revenue rose 21% hoh to S$1bn as yard production recovered from Covid-19 stoppages in 1H21. Current workforce remains steady at c.15k vs. 3Q21. With the gradual reopening of borders, labour shortage in Singapore has eased as costs to bring in new labour have reduced. Therefore, management does not expect further significant provisions as the current manpower level is sufficient to complete existing projects. We believe this is a key reason behind SMM’s guidance of a “significantly better financial
performance for FY22F”. Due diligence process is ongoing for the proposed merger with Keppel O&M and SMM also expects to finalise it by 1Q22, as guided by Keppel Corp.
More positive tone
YTD, SMM has delivered 3 out of 12 projects scheduled for 2022. It is also on track to conclude negotiations on project completion terms with its key customers and is likely to see stronger revenue contribution in 1H22F. Management sounded positive about some contract wins by 1H22F with contract size on average ranging from S$500m to S$1bn. Some of the contracts underway include the EPC contract for US$2bn Dorado FPSO and Antarctic support vessel for the Brazilian Navy. Rising oil prices could provide impetus for deferred expenditure by oil companies.
Reiterate Hold and TP of S$0.09
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$6.4bn based on end-21 reported figures.