Yard capacity to return to 70% in FY23F
- SMM updated that it secured S$6.71bn of new orders YTD with orderbook reaching S$7.11bn. Renewable solutions account for c. 34% of order book.
- SMM expects 2H22F losses to be similar to 1H22’s (S$143m) but is positive on execution for FY23F with yard capacity returning to c.70% of 2019 level.
- Net gearing inched up to 0.53x in 9M22 (1H22: 0.44x), not alarming in our view, on the back of more working capital requirements for new orders.
- Reiterate Add with a TP of S$0.19, based on 1.6x CY23F P/BV.
One-off double-digit S$m repatriation labour costs in 2H22F
SMM expects losses in 2H22F to be similar to 1H22’s c.S$143m due to higher-than-expected labour costs extending into 2H22F. The company had contracted higher-skilled (and therefore higher cost) labour from neighbouring countries to tide it over a labour crunch in mid-2021. Contracts for the temporary workers expired in Jun 22 but Covid-19 restrictions delayed their repatriation, which resulted in one-off costs (double-digit S$m) for SMM in 2H22F. SMM expects them to be repatriated by end-FY22F.
Yard capacity likely to reach c.70% in FY23F
SMM delivered 9 out of 12 projects in 9M22, including the Petrobras P-71 FPSO and appears on track to delivery another 3 projects in 4Q22. In 3Q22, SMM serviced a total of 60 vessels in 3Q22 (1H22: 96 vessels) but stated that improvement in ship repair and upgrades business was slower-than its expectations due to more planning required for some of the vessels, including LNG carriers as well as residual effects of Covid-19 measures. However, management sees repair capacity to return to 2019 levels by 2023F. Note that repairs revenue averaged S$540m in FY18-19 (FY21: S$396m). SMM expects
newbuild yard capacity could return to 70% of 2019 level (FY19 revenue: S$2.9bn).
All eyes on combined entity
SMM has a YTD order book of S$7.11bn with S$6.71bn of new contracts (including S$0.42m in repairs and upgrade) in 3Q22. This includes the S$4.25bn P-82 for Petrobras which commences construction in FY23F (engineering, design and procurement phase has started), as per SMM. Together, Keppel Offshore & Marine (KOM) (not listed) and SMM’s order book is at S$18.9bn, with S$14.8bn of order wins as at 9M22. Completion of merger is still set between Dec 22 and Jan 23 as per SMM. We think the acquisition puts SMM in a stronger position to bid for more orders given its enlarged market share.
Reiterate Add with TP of S$0.19 on 1.6x P/BV
Our TP is based on the average trading band since the oil price crash in 2015. It also represents a 50% discount to the average of 2-4x P/BV in 2013-2016 during the peak cycle. We reiterate Add on improved earnings prospects in light of the upcoming acquisition of KOM (not listed). Potential re-rating catalysts: successful integration with KOM, stronger order momentum, consistent earnings improvement. Key risks: impairments, severe cost overruns, and project cancellations derailing profitability.
