SMM’s turnover grew 21%, with rig building up 14%, and conversion up 20%. Gross margins reached a record of 16.2% in 4Q, and 12.9% for the full year, resulting in gross profit growth of 59.2%. However, in addition to the expense mentioned above, SMM also took a mark-down its Cosco shares and adjustments on foreign currency forward contracts, totalling over S$50m. Associate earnings also posted a loss of S$42.5m in 4Q, due to the weak performance CoscoShipyard Group.
The most disappointing aspect of these results is SMM’s decision to limit its final dividend to 6 cts per share (11cts for the year), despite the rise in earnings, thereby reducing its payout ratio to just 50%, versus 75% in FY07. SMM explained this as prudence in current economic conditions, and conserving cash for potential acquisitions, without being specific. SMM’s current net cash position stands at S$1.8bn, of which we estimate S$1.4bn is customer deposits.
Going forward, SMM will continue to convert on its current orderbook of S$9.0bn stretching to 2012, with good margins. While earnings 2-yr CAGR is a healthy 11% p.a., we expect turnover to taper off from 2011 onwards, with order momentum slowing, and the risk of some orders on hand being delayed or cancelled. SMM has attributed the lack of new orders to the tight credit market, with offshore’s fundamentals being intact. However, we are less sanguine on the health in demand.
We are cutting our price target to S$1.74 from S$2.40 due to the lower dividend payout, which effectively cuts FY09 yield from 13% to 9%. With a cyclical downturn expected to impact growth past 2011, the reduced payout means that shareholders are not able to at least fully benefit from SMM’s current earnings strength. We maintain our Hold recommendation.
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