CGS International analysts Lim Siew Khee and Meghana Kande are keeping their “add” call on Seatrium with an unchanged target price of $2.69 after hosting the group’s management in Kuala Lumpur recently.
Following conversations, the analysts say they are remaining “positive” on Seatrium’s efforts to improve its margins and profitability.
During the session, investors mostly questioned the group about the progress of its legacy projects and further provisions, order outlook and information requests by the Monetary Authority of Singapore (MAS) and Commercial Affairs Department (CAD), they add.
In their Sept 3 report, the analysts note that legacy projects were defined as the two loss-making contracts in the US. One of them is a high-specification trailing suction hopper dredger (TSHD) for Manson Construction while the other is a wind turbine installation vessel (WTIV) for Dominion Energy that is due to be delivered by the end of 2024 or early 2025.
“We estimate the remaining contract value for these projects to be $160 million - $200 million, with projected gross loss margins of 15% - 30%,” write Lim and Kande.
“Management is putting a strong emphasis on project management and attempting to minimise further provisions. 1HFY2024 provision for onerous contracts amounted to $70 million. Shortage of labour, such as welders, would result in cost overruns, in our view,” they add, noting that Elon Musk’s SpaceX, which also requires welders, has set up its new office and industrial factory in Brownsville, Texas.
On the investigation by the MAS and CAD, the analysts believe that the latest probe could be related to past statutory disclosures. During the session, Seatrium stressed that the investigation was not pertaining to a fresh allegation and that it is continuing to cooperate with the authorities.
In the analysts’ view, sizeable orders could be near-term catalysts for the group. “We believe Seatrium could be finalising a contract with BP for its Kaskida floating production unit (FPU) in the US Gulf of Mexico — BP had achieved a final investment decision on the project in July 2024 and expects production to start in 2029,” they write.
Seatrium was awarded a letter of intent for the engineering, procurement, construction and commissioning for the project in June. The analysts now estimate the contract size to range between US$600 million ($784 million) to US$700 million.
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“Medium-term projects in the pipeline could include high-voltage direct currents (HVDCs) from 50Hertz Germany and Tennet,” they add.
For the 1HFY2024 ended June 30, Seatrium reversed into earnings of $36.0 million thanks to its “aggressive” cost savings in selling, general and administrative expenses (SG&A) in addition to better gross margins.
That said, the group’s share price has underperformed by 7% despite its results announcement on Aug 2. The underperformance is likely due to the market’s lack of confidence in Seatrium’s ability to improve its core gross margins, note Lim and Kande. The market may also remain concerned over any further provisions for onerous contracts, they add.
That said, Seatrium remains the analysts’ top pick as they see potential of a “strong” turnaround in 2HFY2024 with an estimated 184% h-o-h increase in net profit.
As at 12.48pm, shares in Seatrium are trading 1 cent higher or 0.64% up at $1.58.
