Analysts from CGS-CIMB Research, OCBC Investment Research and DBS Group Research have maintained their “add”, “buy” and “buy” calls on Seatrium , respectively, with unchanged target prices of 19 cents, 18.5 cents and 18 cents.
Citi Investment Research has, however, kept its “sell” call on the company with a target price of 10 cents.
Seatrium reported a loss of $264.4 million for the 1HFY2023 ended June 30 in the combined group’s first results announcement since the acquisition of Keppel Offshore & Marine (Keppel O&M) by Sembcorp Marine (SembMarine) was completed on Feb 28.
Gross loss for the period was higher mainly at $150 million due to higher costs from certain projects and merger-related costs amounting to $231 million, which were mitigated by higher contribution from repairs and upgrades. Along with higher finance costs, this led to a higher net loss of $264.4 million in 1HFY2023 compared to the loss of $142.9 million in the corresponding period last year.
CGS-CIMB’s Lim Siew Khee notes that this loss was announced against her expected gross profit of $48 million for the period. She is attributing the loss primarily to provisions to the Wind Turbine Installation Vessel (WTIV) for Dominion Energy due for delivery in 2HFY2024. “We believe there could be more provisions in 2HFY2023 as projects are still on-going, albeit the quantum could be less than in 1HFY2023,” she says.
Noting that Seatrium has guided a reported loss in FY2023, Lim has factored some S$100 million worth of provisions, resulting in a 1% dip in gross loss and around a 6% ebitda margin for 2HFY2023.
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However, the group’s revenue for the 1HFY2023 period stood at $2.89 billion, 163.5% higher than the previous half-year’s revenue of $1.09 billion, due to the combination’s consolidation of projects, strong operational execution, the achievement of product milestones and initial contributions from new projects.
Lim says that the “strong revenue” posted as a combined entity was supported by a 184% y-o-y spike in ship and rig building and conversion revenue which increased to $2.03 billion. Seatrium delivered 144 repairs in the first half of FY2023, compared to 96 in 1HFY2022, while repairs and upgrade revenue were up 147% y-o-y to $504 million with an average value per repair of $3.5 million due to high-value work such as Floating Storage Regasification Unit (FSRU) upgrades.
“We expect stronger 2HFY2023 for this segment given tight capacity globally amidst heightened activities in the offshore market,” says the CGS-CIMB analyst.
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Noting that Seatrium’s $1 billion operating cash flow turned positive in 1HFY2023, Lim says if provisions for cost overruns are contained in FY2023, she expects the group to hit an ebitda of 13% in FY24F. Her target price of 19 cents is based on a 1.5x 2024 price-to-book value ratio (P/Bv).
According to OCBC’s equity research team which has maintained a target price of 18.5 cents, Seatrium is “turning the page” but its integration will also “take time”. They believe a net loss for Seatrium is to be expected in FY2023, although next year should see an improvement for the group as more time would have passed for its integration, and as it ramps up on projects in its orderbook.
Although the combined entity results in a “premier global player” in the energy sector well-positioned to capture opportunities in both the renewable energy and traditional energy segments, the OCBC team notes that there are also several risk factors that investors should keep in mind. These include restructuring costs and integration efforts which would still be required post combination, cost inflation issues and customer concentration and order deferment risks.
In the meantime, Seatrium will continue to execute orders worth $19.7 billion, of which 40% is from renewables and cleaner or green solutions, with progressive deliveries up to 2030.
With the group’s “spectacular order wins” since 2HFY2022 — which has led to the combined orderbook tripling to over $20 billion as of May-2023 — Ho Pei Hwa of DBS says losses should narrow as yard activities increase in FY2023, and that an earnings turnaround is in sight.
She believes Seatrium’s operational improvement and order wins are key rerating catalysts for the stock whose share price has tumbled over 90% from a five-year high of around $1.50 in early 2018 on the back of huge losses, a depleting order book and skyrocketing gearing levels.
However, the tide is turning now, says Ho. The group’s balance sheet has strengthened following two rounds of rights issues and its order book has climbed from just over 1x revenue coverage to around 3x currently, with an outlook that is bright in both the conventional energy and renewables space.
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“While potential integration hiccups and costs could pose some downside risks this year, these should be one-offs. Beyond this, we expect Seatrium to reap the synergies from the merger, on both the cost and revenue front, and turn profitable by FY2024,” says Ho.
The DBS analyst has kept her target price unchanged at 18 cents based on a 1.5x FY2024 P/Bv, pointing to upside potential of 26%. “We believe 40% of the rerating could come from the earnings turnaround and 60% from an uplift in the valuation multiple from 1.2x P/Bv towards 1.5x P/Bv, on the back of the robust order momentum and integration synergies.”
Near-term risks remain
While most analysts believe that Seatrium is charting a course for profitability, Jame Osman has kept his “sell” call with a target price of 10 cents.
“While the market appears to be treating this as a one-off ‘kitchen-sinking’ exercise, we see risk of further provisions into 2HFY2023 considering that they relate to operational execution of current projects on hand, which could continue to be impacted by persistent labour and supply chain challenges in the near-term,” says Osman.
He adds that Seatrum’s management highlighted that project execution would ultimately be key even for newer orders which could factor in risk-sharing or cost indexation mechanisms.
Meanwhile, although the group’s current gearing post-combination is healthy at 0.17x, Osman says its interest burden remains high even on an ex-provision basis with a net debt position of $1.4 billion and blended interest cost of over 4% as at end-1HFY2023.
Looking ahead, he believes it is likely the group will need to increase gearing to fund working capital for the upcoming significant projects in the pipeline. Osman notes that Seatrium management was not able to share targets on gearing levels but that it is “cognisant” of the need to “urgently review capital structure” and focus on cash flow-neutral projects in the interim.
While the Citi analyst is looking towards further clarity on integration plans as well as financial targets to address near-term risk factors, he believes Seatrium’s healthy order book position as well as recent order wins in the renewables space are positive steps forward in the company’s strategic pivot to green energy-related projects over the mid to longer-term.
As at 3.49pm, shares in Seatrium were trading 0.1 cents or 0.71% down at 14 cents.
