SMM

SMM: Deutsche tips Vard’s weak results could be a prelude to what may be ahead for SMM. Offshore oil and gas vessel builder VARD recently reported weak 9M13 results with revenues down 6% yoy to NOK 8b, while net income fell 69% yoy to NOK 244m. Its operating margins declined from 12.3% in 3Q12 to 3.0% in 3Q13. The weak performance was attributed to Vard Niterói in Brazil which is facing delays and cost overruns. VARD indicated it is still trying to strengthen project organization and reorganize production processes, but access to qualified personnel continues to be a concern. SMM’s new Brazilian yard is located in Aracruz, about 550-600km North-East from VARD’s Niterói yard. While SMM appears confident of progress at its facility, Deutsche feels it would be prudent to note the risks: (1) SMM is new to drillship construction and may see higher costs as they move up the learning curve, (2) its upcoming yard in Brazil, which is under construction, may face potential cost overruns, skilled labour shortages (a problem across Brazil), construction delays and other initial teething issues new facilities typically experience, and (3) SMM’s margin weakness has come even before the start of its Brazilian yard (see chart below) and based on VARD’s recent results, further downside risks to SMM’s margins should not be ruled out. Note, SMM’s drillship contracts account for 47% of its total order book. Deutsche rates SMM at Hold with TP $4.