Rig-building continued to be the main driver of earnings, accounting for 69% of revenue, and was up 19.6% YoY to S$1.0bn. Ship repair typically showed softness in the current economic climate, with revenue down 11% to S$173m, where shipowners typically reduce its scope of work, resulting in lower average revenue per vessel.
Margin improvement resulted in a YoY 40% improvement in gross profit to S$193m. However, there was a 69% decline in associate earnings to S$12.0m, due to the woes of Cosco Shipyard Group (CSG). There was also a net loss of about S$6m on foreign exchange losses which were partially offset by hedges.
SMM’s orderbook stands at S$7.9bn, with additions of S$1.1bn this year, including a S$160m FPSO conversion for MODEC announced yesterday. At the current run-rate, most of this will be converted over the next 5 quarters. As for new rig orders, SMM says that it is still in negotiations with several parties. Notably, SMM is gearing itself up to bid for jobs from Petrobras, which is slated to spend over US$100bn for upstream projects. However, so is everyone else – the resulting competition is likely to put pressure on margins on contracts from Petrobras.
We are tweaking our FY09 earnings forecast up by 2.3% to S$508.5m to factor in improved margins. We also raise SMM’s price target to $2.91 from $2.73 previously, on the higher forecast and market value of Cosco shares in our sum-of-the-parts valuation. While 2-yr earnings CAGR is still 11.3% p.a., we expect turnover to taper off from 2011 onwards. While we do expect the rig market to pick up, we are unlikely to see the same strength as the last boom cycle between 2005 and 2008. Maintain Hold.
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