4Q13 core PATMI fell below our expectations but was broadly in line with consensus. Full-year DPS was SGD 13cts.

Operating margin of 11.1% in 4Q13 was not a disappointment as this was not helped by higher-margin ship repair projects.

Maintain BUY on cheap valuation but trim TP to SGD5.04. Expect margin expansion from FY14E.

What’s New

Adjusting for SGD33.2m of tax incentive for investments, SMM’s 4Q13 PATMI came in at SGD149.3m (+21.1% YoY, +15.1% QoQ), below our expectations. The bottom line was also weighed down by weak performance from its associate, Cosco Corp. However, operating margin of 11.1% did not disappoint, considering that it included a conservative initial recognition of the second Sete Brazil drillship and the ship repair volume came in smaller than expected. Full-year DPS of SGD 13 cts is lower than our forecast of SGD 15 cts.

What’s Our View

We had expected higher ship repair revenue of SGD300m (actual SGD163m) to boost 4Q13 operating margin to 12.0%, but this did not happen. Even so, we view operating margin of 11.1% as supportive of our margin expansion thesis, given that margin would have been close to our estimate of 11.7% had ship repair volume met our forecast. SMM attributed this to the initial ramp-up phase and remained confident in achieving FY14E ship repair revenue of ~SGD1.2b. Net orderbook stood at SGD12.3b and management said there were strong contract enquiries since last November, which we believe could soon translate into firm contracts. We cut FY14E/15E earnings by 5%/8% as we trim revenue by 2%/4% and lower our operating margin. Our SOTP-based TP is now SGD5.04 (from SGD5.14). Maintain BUY on cheap relative valuation (2.7x FY14E P/BV vs mean of 3.6x). Our view on margin expansion vs consensus expectations of a contraction is intact.  

Source: Maybank Kim Eng Research - 25 Feb 2014