SMM

SMM: weak 3Q12 results that disappointed the Street. Sales declined 32% yoy to $892m, while net profit fell 48% to $116m. Sales was affected by lower recognition of rig building projects. Operating margin of 14.1% was below mkt expectation of 15.7%. mgt attributed the fall in margin from 16.2% in 3Q11 to newbuild contracts secured at lower prices since 4Q10 and more conservative profit recognition at the initial stage of construction for new rig designs. Mgt noted that 2013 operating margin could decline further to 10-13% vs mkt expectation of 14.4%. this is driven by the start of profit recognition for a no. of new pdts, incl the Sete Brasil drillship, Helix semisub well intervention rig, as well as North Atlantic Drilling harsh environment semisub. Ytd, SMM has won new orders worth 49.1b and the net order book stands at $12.1b (both new records), with visibility to 2019. Excluding Petrobras contracts, it would have secured $2.2b of contracts ytd. Citi keeps at Buy with TP $6.10, but notes in the near term, there are risks to downside volatility on the back of the weaker-than-expected quarterly results and further consensus downgrades. Nomura keeps at Buy, but cuts TP to $5.60 from $6.32. JPM keeps at Overweight, but lowers TP to $5.40 from $5.80. Credit Suisse maintains Neutral, lowers TP to $4.30 from $4.40 on lower margin expectation. Deutsche downgrades to Hold, cuts TP to $4.90 from $5.50. Notes preference for Keppel Corp (Buy, TP $13.50). UBS downgrades to Neutral from Buy, cuts TP to $5.06 from $6.15. CIMB downgrades to Neutral on cut in earnings/margins forecast, lowers TP to $5.01 from $5.85. DMG downgrades to Neutral, cuts TP to $4.61 from $5.70.