SMM

SMM: 2Q14 results below expectations, as net profit rose 5.4% y/y to $131.6m. Revenue climbed 19.3% to $1.3b, mainly due to higher recognition for rig building projects (+39.1% to $873.6m), but was slightly offset by a decline in Offshore and Conversion revenue (-10% to $295.4m) and reduction in Repair revenue (-5.1% to $149.8m). Repair segment was the disappointment on the back of a tough shipping sector environment. Operating margins fell by 1.5ppt to 11.5%, on the back of forex loss arising from revaluation of assets denominated in € and US$ to S$, as well as lower scrap sales and rental income. YTD orderwins of $2.5b is 57% of Maybank-KE’s full year forecast, while net orderbook stands at $12.7b, with deliveries stretching to 2019. Though management highlighted that the 2 Brazilian drillships are progressing to plan, Deutsche is increasingly flagging execution risks. Recall that the first hull should have left Singapore to Brazil in 4Q13, but that was ultimately pushed-out to end Oct-14. That said, for the 1st Sete Brazil drillship, 70% of the revenue has been recognized, whilst the 50% local content requirement has been met as the contents have been imported from Brazil. Aside, HSBC guides that margin pressure is unlikely to go away soon due to 3 factors, being 1) heavier cost structure of Brazil local content requirements, 2) gradual ramp-up of new Singapore yard and 3) aggressive rig pricing and financial terms from competition. On outlook, HSBC remains cautious about the offshore newbuild rig market due to a delivery concentration in the next few years, which the industry will need time to absorb the capacity. NAV stood at $1.3232, translating to P/B of 3.1x Interim dividend of 5¢/share declared. Latest broker ratings: Maybank-KE maintains Hold with TP of $4.04 JP Morgan maintains Neutral TP of $3.90 Deutsche Bank maintains Sell with TP of $3.65 HSBC maintains Underweight with TP of $3.80 CLSA maintains Underperform with TP of $4.10 UOB KayHian maintains Hold with TP of $4.23