Seatrium, which also saw higher gross profit margins of 7.4%, double y-o-y, will continue to expand in the second half of the year as provisions for onerous contracts taper off. While the company’s 1HFY2025 gross profit margins fell slightly below Lim’s estimate of 8.3%, the analyst notes that the figure would have been at 8.6% if not for the $43 million in provisions for onerous contracts.
“We believe gross profit margin (GPM) improvement in 1HFY2024 was due to the execution of projects and ongoing cost optimisation efforts. Pure selling, general and administrative expenses (SG&A) as a percentage of sales (excluding depreciation and other impairment/write-offs) reduced to 2.9% in 1HFY2025 from 3.6% in 1HFY2024,” Lim writes.
“Deleveraging efforts are paying off as well – with interest expense down 32% yoy to $90 million as Seatrium continues debt repayments; cost of debt fell to 4.4% (FY2024: 4.9%),” she adds.
As such, the analyst believes more operating leverage is ahead as Seatrium carries out its P-series projects and lower provisions onerous contracts with the delivery of Manson Construction contract in 2HFY2025.
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Despite Lim’s expectations of margin expansions in the 2HFY2025, the analyst has lowered her gross profit margin forecast to 8% from 8.3% for FY2025.
On its lower orderbook of $18.6 billion for the 1HFY2025, Lim estimates Seatrium’s order wins year-to-date to be under $1 billion. The 25% y-o-y decline reflects “the absence of new order wins during 2QFY2025 and progressive revenue recognition from major deliveries, such as FPSOs (floating production storage and offloading vessels) BW Opal and One Guyana.”
As management remains confident of converting a pipeline of opportunities worth around $30 billion into its orderbook in the near term, Lim has kept her order wins forecast of $4 billion for FY2025.
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Following Seatrium’s July 30 announcement, when it finalised the details of Operation Car Wash with a final payment of $241.7 million to the Brazilian and Singapore authorities, Lim believes the key overhangs for the stock have been removed. No new provisions would also be required.
Lim has maintained “buy” on the stock with an unchanged target price of $2.80.
Overall, the analyst sees that the “worst could be over” for Seatrium and its 1HFY2025 results could be the “real inflection point” for margins and profits.
Looking ahead, re-rating catalysts include tight cost controls to improve its margins, order wins, potential gains from asset monetisation initiatives and higher dividends. On the flipside, cost overruns and project cancellations are downside risks.
Shares in Seatrium closed 13 cents lower or 5.42% down at $2.27 on July 31.
