Analysts are remaining positive over Seatrium’s prospects after the offshore and marine (O&M) group released its business update for the 3QFY2024 ended Sept 30.
On Nov 11, Seatrium said it had a net order book of $24.4 billion as at Sept 30 comprising 30 projects with deliveries till 2031.
“Seatrium's third-quarter business update contains no major surprises. It delivered three projects to customers year to date, including the fourth newbuild jack-up rig to Borr Drilling and a refurbished floating production unit to Salamanca FPS Infra,” says Lee Chokwai, director of Morningstar equity research.
Lee, who has kept his “four star” rating and fair value estimate of $2.66, believes Seatrium is “on track” to turning profitable in FY2024 after reporting losses since FY2018.
This is due to Seatrium’s “healthy” orderbook as at the end of September, as well as the interest-rate-cut cycle. With the latter, Seatrium’s management expects its financing costs to continue to decline in FY2025 as the group is able to negotiate favourable rates with the banks.
However, the group still faces uncertainty from the ongoing investigations from the Monetary Authority of Singapore (MAS) and the Commercial Affairs Department (CAD), which is an overhang, says Lee. Seatrium, on June 14, announced that the authorities requested for information as part of their joint investigation into the group over the long-drawn bribery case in Brazil, dubbed Operation Car Wash.
See also: UOBKH calls Centurion Corp a stock for ‘growth-minded investors’
The potential of making further provisions for its legacy projects also remains another near-term overhang, although most of these projects should be completed by the end of 2024.
“We think Seatrium is undervalued currently as the outlook for the offshore industry remains positive,” Lee writes in his Nov 11 report. “We expect a gradual margin recovery for Seatrium as it learns from previous project cost overruns and focuses on series-build projects to improve cost efficiencies. We forecast operating margin to reach 10.3% by FY2028 from our FY2024 estimate of 5.0%.”
CGS International (CGSI) and UOB Kay Hian have kept their “add” and “buy” calls on Seatrium with unchanged target prices of $2.69 and $2.80 respectively.
See also: With 300MW wind-solar project win in India, Sembcorp at 64% of 2028 renewable energy goal: CGSI
Like Morningstar’s Lee, the analysts at CGSI and UOB Kay Hian see the investigations by MAS and CAD as an overhang. They add that any finalisation of the investigations is a catalyst and could lead to a re-rating of the counter if removed in the near- to medium-term.
CGSI analysts Lim Siew Khee and Meghana Kande believes that execution is “still key” for the group while UOB Kay Hian analyst Adrian Loh noted that Seatrium’s quarterly update showed that the group has continued to “execute well” on its projects.
On Seatrium’s letter of intent (LOI) signed with Japan-based Penta-Ocean Construction (POC), Lim and Kande estimate US$400 million ($537.3 million) to US$500 million of engineering, procurement and construction (EPC) contract value for the heavy lift vessel. The full EPC contract award is expected to take place in 1Q2025, subject to POC’s final decision. The signing of the LOI was announced on Nov 11, the same day as the release of Seatrium’s quarterly update.
“For comparison, Seatrium secured semi-sub crane vessel from Hereema (20,000 ton) for US$1 billion in 2015 that encountered cost overruns due to variation orders and scale of project,” say Lim and Kande. “We believe project risk for POC is lower as the scale is smaller and design is foundation based versus Hereema’s floating based. We expect gross margins of low to mid-teens for POC’s vessel.”
UOB Kay Hian’s Loh also estimate the LOI to be around US$400 million, adding that the project will be a “relatively low-risk” one for the group. “[This is because] it is a foundation-based project compared with the higher-risk US$1.5 billion Heerema project that ran into cost overrun issues due to its more complicated semi-submersible heavy lift hull,” he says.
US wind projects
Following the results of the US presidential election, the CGSI analysts see that Seatrium is unlikely to lose out from President-elect Donald Trump’s win as the group has a complete suite of product offerings from oil and gas to renewable related offshore structures.
For more stories about where money flows, click here for Capital Section
“Offshore wind projects in the US in order book have achieved final investment decision (FID) with low risk of cancellation. Tightness in global yard capacity also works in Seatrium’s favour with its global network,” they write in their Nov 11 report.
As such, they are keeping their order win estimate of $16 billion for FY2024 unchanged.
This sentiment is also shared by UOB Kay Hian’s Loh who adds that outside of the US, offshore wind projects continue to be favoured by governments. This is aided by potentially lower interest rates and the enabling of higher contracted prices by certain governments, Loh notes.
“Seatrium remains our top pick for a strong turnaround in 2HFY2024,” say Lim and Kande.
Loh also continues to “like” Seatrium as he sees the group benefitting from “stronger offshore marine dynamics as well as demand for offshore vessels and structures related to the renewables industry”.
“In addition, the normalisation of economic activity should result in a greater volume of shipping activities, thus positively impacting its repairs/upgrades segment,” he says. “While 40% of Seatrium’s current orderbook is in the renewable energy space (with the remainder related to oil and gas projects), its addressable market is arguably much larger when considering carbon capture usage and storage, floating liquefied natural gas (LNG), and ammonia storage and transport which feeds into the hydrogen energy chain.”
Loh has maintained his “overweight” rating on the offshore and marine (O&M) sector.
Shares in Seatrium closed 2 cents lower or 1.08% down at $1.84 on Nov 18.
