• Excitement subsides
• Gradual improvement in industry
• Wait for clarity on a few factors

Normalisation of Share Price

After a ~45% rally in from mid Jan to early Feb, SMM’s share price has corrected about 28% from its peak since then. The rally, which was arguably fueled by higher oil prices, market talk about corporate restructuring, and expectations of new orders, was dampened following SMM’s results and management’s update that “the immediate outlook remains challenging” and it will “take some time for capex spending to translate into new orders”.

In our view, this seemed relatively more conservative compared to what the market was expecting earlier. No mention about the marine business during the update of Sembcorp Industries’s strategic review also dampened fervor for the stock.

Industry Improving…

As mentioned in our earlier reports, the industry continues to recover, but gradually. Major oil and gas players are firming up their final investment decisions (FIDs) as oil prices stabilise; breakeven costs for offshore oil and gas have also dropped with cost deflation in recent years.

As such, barring a plunge in oil prices, we are expecting more new orders for SMM this year, considering that it also signed two LOIs last year worth at least S$1b; one for SeaOne to build at least two large Compressed Gas Liquid Carriers and another for Shell’s Vito FPU.

… Consider Company-specific Factors Too

There is also the possibility of cost savings as the group consolidates its operations in the new Tuas yard which is highly automated and requires less labour. The mega yard also allows the group to tender for larger orders that it previously could not secure due to space and capabilities constraints.

Meanwhile, the market would also likely monitor the developments relating to Mr. de Jesus in Brazil; the date of the court hearing is not yet known. Considering the recent easing in oil prices and pending a sustained flow of new orders with clarity on margins, we lower our multiple to 1.7x FY18/19 book such that our fair value estimate eases to S$2.07.

Source: OCBC Research - 5 Mar 2018