Focus should be on risks in Brazil as VARD stumbles (Deutschabnk)

New orders are positive...

SMM recently announced that it has secured two contracts worth a total of US$417m from Oro Negro for the construction of two jack-up rigs. Scheduled for delivery at end-July 2015 and end-3Q15, these orders are the fifth and sixth units from the same customer (secured at the same price as the previous two units). The wins are positive and support the view from both KEP and SMM that the jack-up market remains active with continued enquiries from customers. While competition has risen from some newer North Asian entrants, we continue to believe that established drillers and oil companies would still look towards using proven O& M yards, especially with the renewed focus on safety and the need for equipment quality and reliability. With this order, SMM’s YTD wins total about S$3.2b (this includes the S$900m LOI from Det Norske) and is on track to reach our FY13E estimate of S$5.5b.

...but focus should be on risks in Brazil

VARD Holdings (VARD SP, Not rated), an offshore and specialized vessels builder, recently announced that while it remains confident in the long-term potential of the Brazilian market, operating conditions are challenging with high personnel turnover and very high pressure in the subcontracting market. As a result, the group indicated that its 2Q13 financial results would be lower than Street estimates. Management highlighted that margins have been impacted by further delays and cost overruns at its Niterói yard due to lower productivity than expected, additional costs for outsourcing of hull construction activities to subcontractors, and revisions to the estimates of start-up costs at its new Brazilian shipyard, Vard Promar.