• Strong visibility from record orderbook
• Robust pipeline; FY13 order wins raised to S$5bn
• Earnings to bottom in FY12 and poised for recovery from FY13
• Maintain BUY, TP S$5.85
Major Petrobras orders secured; strong visibility from record orderbook. August was a bumper month for SMM, with S$6.1bn added to its orderbook. Included were the five drillships and the two anticipated FPSO projects for Petrobras. These have set new records for SMM, with FY12 YTD order wins of S$9.1bn exceeding pre-crisis peaks, and its S$12.6bn orderbook translating to a bookto- bill of 2.6x, extending earnings visibility.
Robust pipeline; FY13F order wins raised to S$5bn. On the back of rising rig day rates and tightening rig capacity, the pipeline for potential orders remains robust. We raise our FY13 order wins assumption to S$5.0bn (prev S$4.0bn) in view of this; no change to our FY12 non-Petrobras order wins assumption of S$5bn. In the near term, we see SMM as a key contender for two harsh environment Cat J jackups for Statoil worth >US$1bn.
Earnings to bottom in FY12; poised for recovery from
FY13. We expect earnings to bottom in FY12, before recovering 17% yo- y in FY13F, and 4% in FY14F. The recovery in earnings is expected to commence from 2H12, which forms 61% of our FY12F, buoyed by higher turnover and improved margins. We maintain our FY13F despite raising our order wins assumption as we tweak our orderbook recognition schedule. Growth in FY13/14F is underpinned by higher revenues from orderbook drawdown, and on commencement of higher-margin ship repair contributions from the new yard in FY13, with full year contributions from all 4 drydocks in FY14.
Maintain BUY. Our SOTP-based TP for SMM of S$5.85 is maintained. We have pegged the valuation of its core businesses to 16x FY13 PE (unchanged), +0.5SD to historical mean. SMM is a prime beneficiary of the current upcycle of deepwater, harsh environment rigs. We see near term catalysts in the form of strong order wins momentum on a robust project pipeline and improving earnings outlook. Maintain BUY.
Financials and valuation
Expect a stronger 2H12. We believe SMM’s earnings will bottom in FY12F at S$659m (-6% y-o-y). We expect a stronger 2H12 performance, forming 61% of our FY12F. This will be buoyed by higher turnover as more projects achieve initial revenue recognition milestone and improved margins – management maintains its FY12 guidance of c. 14-15%, implying that 2H12 margins should be >15%, given 1H12 margin of 13.8%. We believe this is not unreasonable as 1) deliveries could see risk contingencies reversed and booked into profits; 2) efficiencies from repeat designs; and 3) recognition of higher priced contracts kicking in.
Earnings to recover from FY13; introduce FY14F. Despite a higher order wins assumption of S$5.0bn, our FY13F is maintained as we make minor adjustments to our orderbook recognition schedule. We project earnings to recover 17% yo- y to S$773m in FY13F, with earnings sustaining into FY14F, with core PATMI projected at S$804m (+4% y-o-y). This will be underpinned by higher revenue baseload from orderbook drawdown, and on commencement of higher-margin ship repair contributions from the new yard across FY13, with full year contributions from all 4 drydocks in FY14.
Scope for margin upside on higher newbuild prices, fast-tracked orders. No change to our FY12/13F EBIT margin assumption of 14.5%/14.4%. This has already taken into account possibly lower margins on initial contributions from the first Petrobras drillship project as we believe margins could be conservatively back-end loaded. Indeed, we believe there could be scope for margin expansion on higher newbuild prices and fast-tracked orders – we note that newbuild prices for jackups have strengthened by c. 14% since 2010, while fast-tracked orders can command a premium of up to 5% of the newbuild price.
Attractive dividend payout likely to be maintained. Notwithstanding SMM’s projected FY12/13 capex of S$700m/S$594m which relates mainly to the new yards in Tuas and Brazil, we believe a dividend payout ratio of 70% (in line with historical average) is possible, given its strong balance sheet. We estimate SMM will still remain in a net cash position of >S$850m, even after taking these into account. This translates to FY12/13F DPS of 22.0 Scts/26.0 Scts, translating to yields of 4.4%/5.2%.
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