SMM

SMM: Deutsche has 7 reasons to stay negative, as SMM moves into 2015. 1) Oil prices have been weak and SMM's high correlation with the prices (R-squared of 0.87) suggests likely increased share price volatility ahead 2) more negative newsflow from offshore drillers, for example, Noble Corp recently indicated that the re-contracted day rate of its UDW semisub Danny Adkins (built 1999) declined from US$498k to US$317k. 3) SMM's three outstanding drillship options with Transocean (RIG), which may be at risk of not being exercised in light of its increasingly cautious views. According to RIG, customer programs are being delayed 4) SMM's existing US$1.08bn contracts for two drillships with RIG are back-end loaded payment terms which provides the customer with an option to walk away from the deal with limited impact. 5) Execution risks for SMM in Brazil, considering the continued delay of drillship hull transfer to Brazil (a possible new delay was recently reported by Upstream), the inexperienced and still-under-construction yard in Brazil, and the fast-approaching delivery deadline in June 2015. 6) SMM recently announced a new major S$711m capex spend even as the bulk of its customers are cutting their spending plans; we maintain our view that SMM may be juggling too many critical issues at this stage. 7) Valuation looks unattractive at Deutsche’s FY15E PE of 15x, which may rise further due to liquidated damages Accordingly, Deutsche’s SOTP derived TP is $3.25, with a Sell rating.