Singapore-listed offshore and marine (O&M) stocks surged this past week, driven by strong orders for Seatrium and Yangzijiang Shipbuilding. Rising shipping rates boosted the sector, with active trading seen in Mermaid Maritime DU4 , Cosco Corporation (Singapore) and Marco Polo Marine 5LY although their prices remained relatively stable.
Seatrium got the buzz started last Saturday when it announced a whopping $11 billion order to build two new floating production storage and offloading (FPSO) platforms, dubbed P84 and P85, for longtime customer Petrobras, the national oil company of Brazil.
These two long-awaited orders came in at a higher price than the $8 billion–$9 billion some analysts expected. While Seatrium’s subsequent 1QFY2024 ended March business update before the market opened on May 28 was scant on financial details, most analysts have maintained their “buy” or equivalent calls and a few were even inspired to raise their respective target prices.
In 1QFY2024, Seatrium’s net order book hit $25.8 billion, which comprises 31 projects with deliveries till 2030 and year-to-date (ytd) order wins of $11.4 billion.
Following the update, Adrian Loh of UOB Kay Hian raised his target price from $3.02 to $3.23, making him one of the more bullish among his peers. The “qualitative” business update from Seatrium has continued to “strongly underline” its exposure to global large-scale offshore projects such as the production of oil and gas and offshore wind power.
Citing Seatrium CEO Chris Ong, Loh estimates that the company should be able to maintain margins from these two new orders in the 8%–11% range.
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As described by Ong during the business update, P84 and P85 were “largely the same” in terms of the platform with the previous projects, but there were “a lot of technologies” that were included to achieve better fuel economy and “greener” technologies such as non-flaring and decarbonisation considerations.
These two FPSOs aside, Seatrium’s large wind orders are also “still in play” with the contract allocation for TenneT’s third 2GW high voltage direct current (HVDC) projected expected to close in June and no delays expected, says Ong.
Seatrium has also seen an “uptick” in the number of repair and upgrade jobs for drilling rigs. The way Loh sees it, Seatrium’s repairs and upgrades segment, which has won orders of some $350 million ytd, should be able to enjoy sustainable revenue growth in the long term. “While the industry has not seen any orders for new drilling rigs, the higher day rates and utilisation rates across all assets in the industry should lead to new orders in 2025 or 2026, in our view,” Loh writes in his May 29 report.
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“We note that higher spec jack-ups, despite uncertainty created by Saudi Aramco’s contract cancellations in the Middle East, have exceeded US$200,000 ($270,595) per day in several recent contracts,” he adds. “Apart from drilling assets, production assets remain in demand due to the stable and relatively high oil prices, with management singling out the Gulf of Mexico as having opportunities.”
Loh remains “overweight” about the overall O&M sector and believes that Seatrium will “benefit from stronger offshore marine dynamics as well as demand for offshore vessels and structures related to the renewables industry”.
“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 taking into account carbon capture usage and storage, floating liquefied natural gas (LNG), and ammonia storage and transport which feeds into the hydrogen energy chain,” says Loh.
The new order wins from Petrobras are the “main positives”, according to Morningstar analyst Lee Chokwai in his May 29 report. “This reaffirms our view that Seatrium is undervalued currently, with upside to be driven by significant new order wins. We also think its share price should be supported by the ongoing share buyback programme,” says Lee, who has raised his fair value estimate to $3 from $2.40.
With the new FPSOs incorporating new technologies that focus on efficient power generation and increased energy efficiency, Lee sees the emphasis on cleaner and greener solutions as beneficial for Seatrium’s order book.
“In particular, given the firm’s track record in winning repeated contracts from Petrobras, we believe Seatrium’s capability to meet the local content requirements continues to give it an edge in benefiting from the rising demand for FPSOs in the region,” he says.
While the analyst has kept his earnings estimates unchanged for FY2024, he has raised his FY2025 to FY2026 earnings estimates by an average of 30%, as the construction of the FPSOs will only begin in the 1Q2025. The final delivery of the FPSOs is expected to take place in 2029.
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MSCI exclusion a buying opportunity
CGS International analysts Lim Siew Khee and Meghana Kande continue to like Seatrium for its order wins and “turnaround story”, and kept their “add” call with an unchanged target price of $2.62. Based on its order book, they estimate Seatrium’s 1QFY2024 revenue to be at around $2 billion, slightly below their earlier expectation of $2.2 billion.
“We believe this is due to the timing of project completion, which could gather pace in subsequent quarters,” they write in their May 28 report. “Legacy projects as of 1QFY2024 stands at $328 million, or 1.3% of Seatrium’s order book.”
Ho Pei Hwa of DBS Group Research has kept her “buy” call and target price of $3 after seeing a “bright order outlook” for Seatrium. She calls the strong order wins a “confidence booster” and expects more orders from existing customers TenneT and Petrobras. TenneT plans to build 60GW of offshore wind capacities by 2030 and has only awarded 28GW so far while Petrobras is said to have opened the invitation to tender for another FPSO contract in the 2H2024, according to industry publication Upstream.
Before the contract win, Seatrium was in the news for being one of the five Singapore stocks to be removed from an MSCI index, which sent its share price down 15% in the middle of May. Ho points out that further selling pressure before May 31, the effective date of the MSCI removal, is inevitable but unwarranted given the intact fundamentals. “We believe the massive FPSO contracts marked the bottoming out of the stock, providing the much-needed confidence booster. We maintain our confidence in Seatrium’s turnaround,” says Ho.
Similarly, OCBC Investment Research (OIR) analyst Ada Lim agrees that Seatrium’s fundamentals remain and that the tumble earlier this month was a “knee-jerk reaction”. The overhang from Seatrium’s impairments also appears largely priced in. That said, following adjustments to her forecasts, Lim’s fair value estimate has been lowered to $2.60 from $2.73. Her new estimate is pegged to a forward P/B multiple of 1.3 times.
In its 1QFY2024 business update, Seatrium also revealed that it had successfully divested the Batangas yard in the Philippines. When asked whether the group made a gain or a loss, CFO Adrian Teng simply replied that it was “positive”.
Conservative guidance
Besides Seatrium, Yangzijiang Shipbuilding saw heightened market interest with yet another round of new order wins. While Seatrium’s prospects are tied closely to the energy market, Yangzijiang is enjoying a lift from demand for new ships from an industry whose business of plying long-established shipping routes is facing security issues, thereby forcing detours and resulting in kinks and delays down the whole network.
Most recently, ships sailing through the waters of Yemen face attacks from Iran-backed Houthi militias. To avoid getting hit by their missiles, ships were forced to make lengthy detours. Ships from Asia bound for Europe will need up to a fortnight of voyage if they are to round the Cape of Good Hope instead of cutting through the Red Sea. According to shipping services provider Clarkson, container ship arrivals in the Gulf of Aden, at the entrance to the Red Sea, are down 90%. With demand for cargo moving capacity unchanged, shipping rates have shot back to the pandemic levels amid what was supposed to be a seasonally quiet period.
On the evening of May 27, Yangzijiang reported that it secured new orders worth US$3.32 billion ytd, bringing its total order book to a record of US$16.08 billion. The new orders were for containerships backed by strong freight rates, which in turn boosted the profitability of shipowners, leading to increased newbuild orders.
CGS’s Lim and Kande expect the company to win orders totalling US$5.5 billion this year, higher than the company’s own conservative guidance of just US$4.5 billion.
Besides containerships, Yangzijiang is seeing healthy demand for gas carriers too, as it stays on track to deliver 28 such vessels in 1QFY2024 and a total of 63 this FY2024.
Even as orders shot up, Yangzijiang is seen to enjoy steady input costs with China’s domestic steel spot prices stable at RMB4,000 ($743.82) per tonne, which suggests better margins for the company, according to the analysts, who have kept their “add” call but with a significantly higher target price of $2.35 from $1.96 previously. — with additional reporting by Ashley Lo
