This is a re-award of SeaDragon’s 2006 contract with Haverton Hill yard in the UK. While this re-award acknowledges Jurong’s rig-building expertise, it is not necessarily an indicator of a recovery in rig-building demand.
This is the first offshore rig contract for the Singapore yards this year. Although encouraging, it only fulfils 12% of our S$3 bn new contract wins assumption for Sembcorp Marine.
The project, expected to be completed by end-2010, has shorter duration than 36-40 months for a typical semi-sub contract. As a result, our FY09 EPS estimate is revised up by 3% while FY11 estimate is lowered by 2% on higher shorter revenue recognition.
There is no change in our target price of S$0.95 (2008 P/B 1.5x) or our UNDERPERFORM rating. SMM’s premium to peers’ P/B valuation is not supported by its weak customer profile and demand outlook.
Cayman Island-based SeaDragon was founded in 2006, its principal asset comprising two semi-subs under construction. The hulls for these rigs are being built in Russia. Topside integration was to be completed at Haverton Hill yard in the UK but SeaDragon has now re-awarded the contract for Rig 1 to SMM, with an option for Rig 2. Rig 1, managed by Vantage Drilling, has a five-year charter contract with Pemex at approximate day rate of US$503,000, with total contract valued at US$920 mn in revenues. Rig 2 is a speculative build. There is no financial information available on SeaDragon. The hull of the vessel, built in a Russian yard, will be delivered to Jurong by April 2009 and the completed unit is scheduled for end-2010 delivery.
This is the first major win for SMM and the only rig contract win for the Singapore yards this year. While the re-award of this contract testifies to Jurong’s rig-building expertise, it does not necessarily represent a recovery in rig-building demand. In any case, the S$371 mn contract represents 12% of our S$3 bn new contract win assumption for SMM. Another S$2.63 bn in new contract wins is needed to meet our current estimates.
Our 2009 revenue and earnings estimates are raised by 3% due to shorter completion of this project relative to SMM’s typical rig-building contract duration. Our 2011 estimates are lowered by 2% because of the earlier revenue recognition on this project.
Fundamentally, there is no change in our view on SMM or the sector outlook although this may be short-term positive for sentiment. We believe that SMM’s valuation premium on P/B is not supported by its weak customer profile (cancellation/default risk) and demand outlook.
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