Seatrium’s first business update as a newly-combined entity has left a good impression. The company, formed following the long-drawn merger of Sembcorp Marine and Keppel Offshore and Marine, reported strong order growth and evident improvements in its gearing and has inspired analysts to forecast that it can turn around as soon as the next financial year.
“We’ve started the year on a positive note,” CEO Chris Ong says at a briefing on May 12. The priority now is to win more orders and to turn ebitda positive, and then turn his focus on coming up with a sustainable capital structure, which will be a key part of the strategic review estimated by CGS-CIMB’s Lim Siew Khee to take between six to nine months.
For this business update for the 1QFY2023 ended March, Seatrium reports an order book of $20 billion, up from a combined $17.8 billion at the end of last year. The spate of recent wins is largely from offshore wind farm-related projects, which means 39% of the order book is from renewable or cleaner energy projects.
However, Ong warns that offshore wind is no longer a “nascent” field and that to move beyond these low-hanging fruits, the company needs to mark out a more sustainable market position within the broader renewable energy space. “What will fundamentally change the amount of investment, value chain and supply chain? What is the emerging future of energy?” Ong says all such considerations will be part of the ongoing strategic review and help Seatrium shape how it prepares itself as an organisation for sustainable growth.
Seatrium is already looking at how projects can be executed more efficiently and then, over the longer run, and then take a good look at how the overheads can be reduced. “We think building the order book to optimise resources before integration is a priority,” writes Lim in her May 12 note.
Ong, previously CEO of Keppel O&M, stresses that corporate mergers are never easy, especially between “two very capable global market leaders” with unique cultures and practices. “The first thing is to build something to call our own and make sure we get the best talent to bring the company forward,” he says. He wants his new and old colleagues to be aligned and operate in a way underpinned by a common philosophy. “Think of the bigger picture instead of the traditional yard-centric approach.”
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Analysts like DBS Group Research’s Ho Pei Hwa like what she sees. In her May 16 note, Ho kept her “buy” call but with a raised target price of 18 cents from 14 cents, citing how with the “spectacular” new order wins, losses should narrow for the current FY2023 and that earnings turnaround is in sight.
“While potential integration hiccups and costs could pose some downside risks this year, they should be seen as one-offs,” writes Ho. “Looking beyond, we expect Seatrium to reap the synergies from the merger, on both the cost and revenue front, and turn profitable by FY2024.”
Her revised target price of 18 cents is pegged to 1.5 times FY2023 book value, up from 1.2 times previously, justified by “brighter order and earnings outlook.”
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UOB Kay Hian’s Adrian Loh is cheered by Seatrium’s ability to generate cash and pare down debt, as indicated by how its net debt/ equity ratio of 0.26 times as at the end of FY2022 has improved to 0.18 times as at the end of 1QFY2023.
“However, it is the company’s potential to continue to grow its order book in the oil and gas and renewables space that is exciting,” writes Loh in his May 17 note, where he estimates another $10 billion upside to the current $20 billion, and with the company targeting an ebitda margin of 15%.
Besides winning orders, Loh says that the key customers, the oil majors, value Seatrium’s capability to construct in Singapore versus other more politically sensitive locations. “Furthermore, customers have become more open and understanding of supply chain issues and are more willing to share risk,” he adds.
From an earlier target price of 15.6 cents, Loh now figures the company is worth 17 cents, based on 1.4 times book value.
Meanwhile, CGS-CIMB’s Lim maintains her “add” call and 19 cents target price — the highest among her peers — pegged to 1.5 times book. Overall, of the eight active coverages on this stock, five analysts have a “buy” call, one has a “hold” call and there are two “sell” calls with Macquarie’s Foo Zhiwei and Citi’s Jame Osman having target prices of 8 cents and 10 cents respectively.
Ong, shouldering this task of righting the ship, is careful to balance laying down the company’s “huge ambition” while reminding the investment community that much more work must be done. “We are renewing alliances with our partners, our customers, to give them the confidence that they will be taken care of when they have projects with us,” he says.
