SMM

SMM: 4Q14 net profit beat estimates, despite falling 4.6% to $174m, bringing full year net profit to $560.1m (+0.8%).

Top line dropped 14.6% to $1.44b, primarily due to lower revenue recognition for rig building projects ($873.5m, -27%), partially offset by increased contributions in offshore and conversion ($396.1m, +26.3%).

The key surprise of the quarter, operating margin improved to 16.1% (+5ppt) on repeat execution and efficiency gains, and is unlikely to be sustained in subsequent quarters as Brazil contract recognition intensifies.

Management admitted that the delivery for the first Sete Brasil drillship may not meet original Jun’15 schedule, but will minimise the delay with recovery plans. We see additional costs and margin pressure in FY15-17E, especially with increasing recognition of Brazil-related contracts (31-45% of revenue). SMM has not been paid by Sete Brasil since Nov 14 and is owed SGD70-80m.

Order book stands at $11.4b, and a challenging order win environment in FY15 is largely expected.

Final DPS of 8¢bringing full year DPS to 13¢ (FY13: 13¢).

SMM is trading at 2.1x P/B.

Latest broker ratings:
CLSA maintains Sell with TP $1.99
JP Morgan maintains Underweight with TP $2.40
Deutsche maintains Sell with TP of $2.50
Maybank KE maintains Sell with TP of $2.65
Goldman Sachs maintains Neutral with TP of $2.70
Morgan Stanley maintains underweight with TP $3.00
Credit Suisse maintains Neutral with TP reduced to $3.30 from $3.60
CIMB maintains Add with TP reduced to $3.39 from $4.00
Barclays maintains Equal Weight with TP of $3.40