■ We hosted SMM’s management for a non-deal roadshow (NDR) in Kuala Lumpur. We see the opportunity to accumulate ahead of positive newsflow on orders.
■ SMM is likely to achieve, if not exceed, our order target of S$3bn in 2018F, helped by sizeable production/gas projects, including Gravifloat (>US$1bn).
■ Operating leverage may only pick up in 2H18, but gross profit should improve in 1H18, without the kitchen-sinking provisions that were made in 4Q17.
■ Stronger-than-expected orders and potential write-back of provisions from Sete Brasil jobs are catalysts. Maintain Add and TP based on 20-year average of 2.5x P/BV.
S$3bn of orders achievable in 2018…
We are hopeful that SMM will be able to secure at least S$3bn in orders in 2018. SMM has done advanced front-end engineering and design (FEED) work for gas export terminal Gravifloat for Chinese GCL-Poly. We believe finalisation of the contract is likely in 2018. Contract size for phase 1 could be c.US$1bn. The proof of concept of Gravifloat will open the door for more orders, in our view. Currently, SMM is in talks with more than one potential customer for the design.
… and potentially more
Other highly-probable projects include the Karish FPSO which was recently awarded to Technip-FMC (c.US$1.4bn) for integrated engineering, procurement, installation and construction (iEPIC) works. SMM tendered for the shipyard portion and we estimate contract size to be US$300m-500m. Other notable FPSO jobs in the pipeline include the LOI from Shell Vito (potential order of US$300m-400m) and Chevron Rosebank FPSO.
Expect margins to be compressed
We expect margins to be c.7% in 2018-19 given the high turnkey project nature. We believe margins for other newbuild FPSO projects which SMM secured/is tendering for could be better than the Libra FPSO, which involved converting a shuttle tanker to a complex FPSO (cost overrun). The Statoil FPSO project (US$490m) secured at end2017 involved less complex work of hull and living quarters which SMM is familiar with. Upside could come ramping up the learning curve on newbuild FPSO.
Net gearing to be between 0.8x and 1x
Management hopes to achieve net gearing of below 1x, depending on the timing of the remaining US$750m receipt from Borr Drilling, as well as the US$500m for West Rigel. Assuming all are received in 2019, we expect net gearing to improve to 0.7x, excluding any major capex plan. The risk of a cash call in the short-term is less imminent.
Brazil outlook positive
As there have been no employees implicated in the Petrobras car-wash investigation, we are hopeful that SMM will not face any litigation charges. We think SMM could be in the running for some upgrade jobs in Brazil, in addition to the potential re-activation of two drill ships for Petrobras.
Standing against Korean competitors
Investors were also concerned about competition from Korean yards which have historically been strong in the construction of large-scale production structures. We think labour cost advantage and nimbleness in design help differentiate SMM. It takes time to establish a track record, like how it encroached on the Korean semi-submersible space in 2005. The Vito Shell project (stringent requirements) is a testament to its capability.
Current valuations of 1.85x CY18 P/BV still offer the opportunity to accumulate. Key risks include an oil price crash and significant cost overrun. (Read Report)
Source : CGSCIMB Research