Revenue was driven by the rig-building segment, which posted a 56.9% increase to S$759.5m. Offshore and conversion also rose 80.4% to S$401.0m. Both segments reflect SMM’s strong orderbook for offshore oil and gas. EBIT margin at 10.7% was flat versus 1Q08, but weaker versus FY08’s 12.9%. This is in line with SMM’s portfolio of higher value turnkey projects, as well as recognition differences, but is still extremely healthy.
SMM’s current orderbook stands at S$8.4bn stretching to 2012, lower than the S$9.0bn as of end-FY08. SMM only secured S$378m in new orders for the quarter, in line with the uncertain credit and economic environment. We do not expect a quick resumption of orderbook growth, despite an improving credit environment. In fact, we expect customer risk to increase further, as evidenced as by the recent bankruptcy of Petroprod and the non-payment by PetroMena.
We are adjusting our FY09 net profit forecast down by 4.8% to S$497.0m from S$522.0m previously, to factor in the weaker contributions from CSG. While 2-yr earnings CAGR is still a healthy 12.7% p.a., we expect turnover to taper off from 2011 onwards, and the risk of more orders being delayed or cancelled. Despite continued interest in the deepwater segment, we do not see this translating to orders in the near term.
We are adjusting our price target to S$2.31 from $2.07 previously, based on higher shipyard multiples in our sum-of-the-parts valuation. However, we believe that valuations have run ahead of fundamentals in this current liquidity-driven market rally. We are reducing SMM to a Sell, as current share price exceed our target by 19%. With a less attractive dividend yield of 4.7%, shareholders are not fully benefiting from SMM’s current earnings strength.
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