November 23, 2022

A visit to the Tuas Boulevard Yard 

 Today, we visited SMMs Tuas Boulevard Yard, the largest integrated yard in Singapore. SMM has three yards in Singapore: Admiralty, Pandan, and Tuas. 

 We expect revenue from order wins secured in FY22F to be reflected by FY23F and yard capacity to return to c.70% as supply chain issues ease. 

 Reiterate Add and TP of S$0.19 based on our 1.6x FY23F P/BV (the average trading band since the oil price crash in 2015).

Largest integrated yard in Singapore 

● The Tuas Boulevard Yard is built in three phases, with Phase I completed in Jun 2010 and Phase II in Jan 2017. SMM does not have immediate plans to develop Phase III. Together, phases I and II span c.110 hectares, and phase III could span 96 hectares. SMM said the Tuas Boulevard Yard is an integrated yard with well-rounded facilities that include seven drydocks, a 134,000 sqm steel fabrication facility, a robotic welding shop, and gantry cranes with 30,000 tonne-lifting capacity and 100m hook height. 

● Its seven drydocks include a floating dock that can be transported for offshore structures, and capable of docking a fully constructed Very Large Crude Carrier (VLCC). The sheer number of dry docks gives SMM greater flexibility in vessel reshuffling compared to its peers, such as Daewoo Shipbuilding (042660 KS, Hold, TP W19,000, CP W24,455) which has 2 dry docks and 3 floating docks in its Okpo Yard.

Focus on higher value-add processes and more offshore projects 

● SMM offers the full suite of services in the process chain: design and engineering, procurement, construction, and commissioning. Management expressed an intention to outsource the bulk of its construction work and focus on the other three processes as those have higher value-add in the process chain. Its gantry cranes enable SMM to integrate separate parts together onshore which is faster, safer, more cost-efficient, and ensures consistent quality instead of the traditional method of integrating parts in the ocean. Thus, these gantry cranes give SMM the additional edge, as its peers do not have such integration facilities. 

● We also like SMM’s strategy in pivoting to larger depth vessels. Such vessels are usually involved with offshore windfarms. As at 9M22, renewables constituted c.34% of its S$7.11bn net orderbook. SMM targets to have renewables constitute 40% of annual revenue by FY2030F, according to its FY21 Annual Report. We think renewables projects not only improve SMM’s ESG standing, but also shields it from downturns in the oil and gas industry, as in 2015-16. 

Yard operations could pick up in FY23F; maintain Add, TP S$0.19 

● We estimate current yard capacity at c.40-50%, which could be raised to 70% in FY23F. Management said at the yard tour that it is limited by supply chain bottlenecks for rare metals, copper, as well as motherboard and chips. 

● Order wins secured in FY22F are also undergoing the design and engineering stage, which typically range 3-6 months, according to management. Hence, we expect revenue for these projects to only be reflected by 1Q23F or 2Q23F. 

● Management said it expects to repatriate its higher-cost labour by end-FY22F. It currently has c.18,000 employees globally, with c.9,000-11,000 in Singapore (2021: 11,308 employees globally). SMM plans to further increase its 18,000 headcount, with the employment of more workers from Bangladesh/India (normal cost labour) in FY23F, to cater to more project wins secured in FY22F, according to management. 

● Our TP is based on 1.6x FY23F P/BV (average trading band since the 2015 oil price crash). It is also a 50% discount to the average of 2-4x P/BV in 2013-16 during the peak cycle. SMM is trading at 1.1x CY22F P/BV. We reiterate Add on better earnings prospects in light of the upcoming acquisition of Keppel Offshore & Marine (not listed). 

● Potential rerating catalysts: successful integration with KOM, stronger order momentum, consistent earnings improvement. Key risks: impairments, severe cost overruns, and project cancellations derailing profitability.

ADD by CGS-CIMB Research.  Share price closed at S$0.131