SMM

SMM: Deutsche maintaining its Sell call on the counter noting that Recent market interest in SMM has come following orders for two drillships from Transocean. According to Transocean at its recent 4Q13 conference call, the drillship payment terms are very favourable to them at 5% on order placement and 95% upon rig delivery. By accepting such back-end loaded contract terms, SMM has raised its risks as not only does it need to fund the construction largely with internal funds, it will also provide the customer an option to walk away from the deal with limited impact if the need arises. At 5:95, the terms are even less favourable than those previously accepted by some Chinese yards for offshore projects, at 10:90. In order to fund the construction, SMM’s cash holdings might decline and/or its bank borrowings might increase over the construction period. SMM could face a particularly risky 2014, in our view. Not only does it need to handle a potentially challenging major facility ramp up in Brazil, it will also be busy ramping another large new yard in Singapore.