Towards EBITDA positive
- SMM showed a narrower-than-expected losses of S$143m in 1H22 on stronger-than-expected order execution. No major impairment/cost overruns.
- EBITDA losses narrowed to S$31m in 1H22 vs. S$442m in 2H21 as business volume picked up. YTD order win of S$1.9bn with order book at S$2.5bn.
- We think the combined entity could reach profitability by FY24F on the back of expanded order book of S$6.9bn (excluding Petrobras P-80: S$4bn).
- Reiterate Hold. We lift TP to S$0.11, or 0.9x CY22F P/BV (0.7x previously) on gradual confidence in the company as execution and orders improve.
Revenue beat, although still below break-even volumes
1H22 net loss of S$143m is narrower than our annualised 1H22F loss of c.S$190m. The beat came from stronger-than expected revenue of S$1.1bn, driven mainly by the floaters and rigs sector (+34% hoh, +166% yoy). There were project renegotiations and variation orders, as well as pre-FID work done for some projects. SMM expects FY22 to still be in a loss but 2H22 to be better than 1H22 with less residual costs from Covid-19.
Almost towards positive EBITDA
Gross loss margins narrowed to -8% in 1H22 vs. -49% in 2H21 while EBITDA losses dip to S$31m in 1H22 vs. S$422m in 2H21, on the absence of provisions for additional labour costs and impairment. On the back of 1H22, we narrow our loss estimates for FY22F-23F by 6-41% to factor in higher margins and order wins. We also expect net profits by FY24F. We raise FY22F order wins to S$2.5bn (previously S$1.5bn).
Order win at S$1.9bn and hopeful on combined entity order book
We estimate the order win of S$1.9bn to comprise c.S$300m ship repair, c.S$650m wind turbine vessel installation from Maersk, S$200m support vessel for Brazilian navy and c.S$750m of gas topside for the Australian gas project. Accordingly, order book rose to S$2.5bn (1Q22: S$1.75bn). Note that combined order book for both KEP and SMM now would be c.S$6.9bn, pending Petrobras P-80 contract of S$4bn. If we assume P-80 is clinched by 2022, combined order book by FY23F of S$11bn could lead to profitability by FY24F. Excluding integration costs, we expect a run-rate of S$4bn p.a. revenue and net margin of 3-5% in FY24F. Downside risks: cost overrun, impairment derailing profitability.
Cashflow improved on projects and receipt from Transocean
Operating cashflow turned positive to S$307m (1H21: -S$2m) thanks to increased project receipts, including the delivery of Transocean Atlas. Net gearing stood at 0.44x as of 1H22. The second drillship for Transocean, Titan is on track for delivery in Oct 22 with a further US$350m delivery receipt scheduled, strengthening the balance sheet.
Hold with higher TP of S$0.11 (0.9x CY22F P/BV) on 3-year average
Our higher TP reflects improved execution and order wins YTD, as well as more confidence in path towards profitability. Upside risks: stronger margins and orders.
