On Aug 2, Seatrium reported earnings of $36 million in 1HFY2024, which ended June 30. This is the first set of profitable half-year results since the completion of its combination with Keppel Offshore & Marine (O&M), now Seatrium O&M, in 2023.
Before its merger and name change, which also took place in 2023, Seatrium, then known as Sembcorp Marine (SembMarine), suffered six consecutive half-year losses since 1HFY2018. SembMarine also reported five consecutive full-year losses since FY2018.
The improved bottom line for 1HFY2024 was due to the group’s higher revenue, which rose 39.1% y-o-y to $4.01 billion. The revenue growth was mainly due to progressive revenue recognition from newbuild projects and higher repairs & upgrades activities. The revenue uplift was also due to Seatrium’s P-series projects, contributing about 55% to its overall revenue.
At the group’s results briefing, CEO Chris Ong noted that 1HFY2024 was a “busy” and “fruitful” one with the group clinching several “prized” contracts, including the “much-anticipated” newbuild floating, production and storage (FPSO) platforms, P-84 and P-85, for Petrobras and the third 2-gigawatt (GW) high-voltage direct current (HVDC) offshore converter platform for TenneT. Ong also highlighted that the group clinched several projects under its repairs & upgrades business worth over half a billion as at Aug 2.
“There was good progress made in our P-series projects, including hull arrival and integration of topside modules prior to commissioning for P-78, and ongoing construction of the hull, living quarters and topside modules for P-80, P-82 and P-83,” says CFO Adrian Teng.
“The Sturgeon wind turbine installation vessel and the 2GW HVDC offshore converter platform projects were the other material revenue contributors in 1HFY2024,” he adds. Revenue from Seatrium’s repairs & upgrades business also grew to $517 million in 1HFY2024, 2.58% higher than the revenue of $504 million in 1HFY2023.
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In 1HFY2024, Seatrium’s underlying ebitda improved to $390 million, representing a more than nine-fold increase from the ebitda of $36 million in 1HFY2023. The current ebitda excludes the one-off provision of $79 million for the full and final settlement by MH Wirth. Underlying net profit for the group stood at $115 million, surpassing the consensus’ expectations of a core profit of around $50 million.
Referring to Seatrium’s net order book of $26.1 billion as at June 30, which is the highest in a decade, Ong says the group’s strong order backlog, which comprises 32 projects with deliveries till 2031, will underpin its revenue visibility for the next few years. Seatrium clinched $13.4 billion worth of new orders in 1HFY2024.
Ong points out that Seatrium’s profitability turnaround and improved ebitda reflect the group’s “strong focus on project execution, prudent cost management and improved operational efficiencies”. Teng adds that the group is also “on track” to realise its goal of having an annual recurring savings of $300 million by next year.
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Seatrium’s underlying return on equity (ROE) was also a positive 3.6% in 1HFY2024, bringing it closer to its ROE target of 8% or more by 2028 or earlier. On March 15, Seatrium announced its goal to grow its ebitda to over $1 billion and deliver an ROE of over 8% by FY2028.
However, whether Seatrium can maintain its profitability for the 2HFY2024 remains to be seen. In response to a question from the floor, Ong says the group is “encouraged” by its recent results and to have achieved profitability in the 1HFY2024.
“The key to us is the improved ebitda that reflects our strong focus on project execution and operational efficiency, as we have always communicated to the market,” says Ong.
“We do not provide forecasts but we are very committed to sustaining or improving our financial performance for the full year of 2024,” he adds. “The overall performance will really depend on our ability to convert our order book, complete the two US legacy projects in 2024 and also make sure that we are able to do our cost-saving initiatives and lend with a leaner cost structure. Thankfully, the industry outlook remains positive.”
Investor sentiment
Despite Seatrium’s turnaround, investors remained unmoved. On Aug 2, shares in Seatrium closed at $1.49, 11.3% lower than the previous day’s close of $1.68.
When Seatrium guided that it expected to report a net profit on July 29, the market cheered, with Seatrium’s shares peaking at a month-long high of $1.68, 3.7% up from July 29’s closing price of $1.62.
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DBS Group Research analyst Ho Pei Hwa says the sharp correction after Seatrium’s results seemed “overdone”, as she thought the group’s “promising operational recovery” deserved some credit.
In her Aug 5 report, Ho noted that Seatrium conveyed a “commendable operating performance” with “decent” gross margins of 8%, excluding the provision for MH Wirth and the incremental $70 million provisions for onerous contracts recorded under the group’s cost of goods sold (COGS) line.
Ho calculates that Seatrium’s net margin is around 4%, with both provisions accounted for and the disposal gain of $35 million subtracted.
In her view, any sequential operational improvement would be closely tracked to assess Seatrium’s recovery progress since it has been loss-making for six years in a row.
In 2HFY2024, Ho expects any further provision risks to be lower.
“Management is committed to delivering its legacy contracts by 2HFY2024. Barring unforeseen circumstances, risks of further cost overruns shall diminish closer to the delivery date. We believe further provisions, if any, should be much less than in 1HFY2024,” she writes.
“While provisions for onerous contracts are part and parcel of a shipyard business, we find comfort in the knowledge that this batch of low-margin projects will be delivered in the next few months and reduce such lumpy income recognition,” she adds.
On the whole, Seatrium is set for growth as its integration has “progressed well” since the merger in March 2023 and its estimated annual cost savings of $300 million are achievable by the end of 2025.
“Management now aims to grow revenue at a five-year CAGR of 7%–10% to reach $10 billion–$12 billion by 2028. This is backed by a decade-high order book of over $26 billion and robust demand for oil & gas (O&G) and renewable infrastructure,” she says. Furthermore, Ho points out that Seatrium seeks to build capabilities in carbon capture and storage (CCS) and new energies, potentially a long-term growth engine.
Ho has kept her “buy” call on Seatrium with a target price of $3. Her target price is based on an FY2024 P/B of 1.5 times.
CGS International analysts Lim Siew Khee and Meghana Kande have also kept their “add” call with a higher target price of $2.69 from $2.62. Their new target price is still based on a 2024 P/B of 1.5 times.
In their Aug 2 report, the analysts note that Seatrium’s “aggressive cost controls” have borne fruit in its 1HFY2024 results. Seatrium’s net profit of $36 million for the period surpassed the expectations of analysts, who anticipated a net loss of $30 million.
“In 1HFY2024, Seatrium saw an impressive 20% h-o-h drop in selling, general & administrative (SG&A) driven by cost-cutting measures, procurement synergies, and project execution efficiencies. Reported SG&A stood at 4.2% of sales (3.6% excluding depreciation, impairment losses on receivables, and property, plant and equipment or PP&E write-offs) compared to 5.3%/4.8% in 1HFY2023/2HFY2023, respectively,” they write.
“As Seatrium remains on track to achieve its target of $300 million in annual cost savings by end-FY2025, we forecast further improvements in the SG&A run rate to 4.1% for FY2024 and FY2025,” they add.
The CGSI analysts have also estimated Seatrium’s gross margin to be at 6%, excluding the MH Wirth settlement, compared to the group’s reported gross margin of 4%. Seatrium’s adjusted 1HFY2024 ebitda margin was 9.7%, 1.3 percentage points higher h-o-h.
“Seatrium is keeping its target of project-level gross margin in the mid-teens for both current new contracts and eventual adjusted ebitda margin,” they write. “We now expect 2HFY2024’s gross margin to be 7% and FY2024’s gross margin to be 5.6%.”
In addition to their higher target price, Lim and Kande have increased their FY2024 to FY2026 EPS by 4% to 238%.
Seatrium has also surpassed the expectations of Ada Lim from OCBC Investment Research (OIR), constituting 54.2% of her initial full-year forecast. Seatrium’s revenue also came slightly above Lim’s estimates at 51.5% of her full-year expectations. However, the group’s gross profit margin expansion fell slightly short of Lim’s expectations due to the MH Wirth settlement and likely due to some drag from its legacy projects.
In her Aug 2 report, Lim has kept her “buy” call as she likes Seatrium’s “steady cadence” of repair and upgrade contract wins. The analyst has also increased her fair value estimate to $2.64 from $2.60.
“Seatrium’s share price has experienced some correction following a request for information from the authorities pertaining to Operation Car Wash, with the heightened risk of increased legal provisions likely to remain an overhang on the stock,” Lim notes.
At the briefing, Ong noted that the group is supporting the Monetary Authority of Singapore (MAS) and the Commercial Affairs Department (CAD) in their investigations and has promised to cooperate with the authorities.
“Nonetheless, we think its fundamental industry outlook remains constructive and we see positive momentum especially for offshore platforms being contracted at improving margins in the current upcycle,” she adds. “However, investors may need to be patient as it will take time for Seatrium’s management to execute on its order book and deliver the performance necessary to restore market confidence in the stock.”
Citi Research analyst Luis Hilado has kept his “buy” call on Seatrium with an unchanged target price of $1.96 after its “operationally healthy” results. He also likes Seatrium’s long-term prospects of executing on a “substantial” order book.
Based on his estimates, Seatrium’s revenue and recurring/adjusted ebitda are in line at 48% each for FY2024. “The healthy order book momentum should drive a stronger 2HFY2024,” says Hilado.
As at Aug 6, shares in Seatrium closed at $1.42, 40.4% down year-to-date. The group also bought back another 1.35 million shares at $1.4473 apiece on the same day. Since the group obtained its share buyback mandate at its AGM on April 26, the group has bought 6.05 million shares from the market, bringing the total number of treasury shares held to 6.9 million.
