CGS-CIMB’s Lim, in her Jan 30 note, points out that the writedowns are needed for “medium-term value creation”, “cost optimisation” and act as a key catalyst towards eventual profitability.
Lim notes that in 1HFY2023, Seatrium had already provided $231 million for merger expenses as well as higher labour and contract costs in its US yard. For 2HFY2023 which will be reported together with the full year, she expects a writedown of $250 million for the potential closure of fully depreciated yards such as Crescent, Benoi and Tuas, inventory impairment and also cost overruns provisions. She now projects FY2023 losses at $655 million, up from $251 million previously.
Besides the impairments, Lim says that Seatrium’s contract wins following the merger in early 2023 were secured on double-digit gross margins. These include four rigs Seatrium is building for key client Petrobras as well as wind-related projects for Tennet.
However, she flags that contracts won by what was then Sembcorp Marine and Keppel Offshore and Marine are likely to face “tail-end challenges”. These include higher labour and supply chain costs that were not previously factored in, leading these contracts to end up with gross losses. Lim has lowered her gross margin expectations for FY2024 from 8% to 5.5% and for FY2025 from 13% to 10%.
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While Lim has kept her “add” call on the stock, she has cut her target price from 19 cents to 16.4 cents, which is pegged to 1.4 times 11.5 cents book value per share of FY2024, based on the average trading range from January 2015 to last December. Her previous target price was based on a 1.5 times price to book.
For Lim, key positive catalysts include the communication of Seatrium’s strategic review during its investor day yet to be scheduled but is expected to be within the first half of this year. Other upsides include potential opportunistic wins of jack-up rig orders from national oil companies and a turnaround in profitability for FY2024.
On the other hand, DBS Group Research’s Ho Pei Hwa remains upbeat on Seatrium’s prospects. The weaker share price following the profit warning is, to her, a buying opportunity, as she maintains her “buy” call and 18 cents target price on the counter.
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From a recent top of 15 cents last September, Seatrium’s share price had given up around a third of that no thanks to a slew of negative industry news such as woes faced by some offshore wind energy players in the US and Europe.
Seatrium had previously maintained it was not particularly affected. However, its dry spell of significant new contract wins has not gone unnoticed by the market either.
The way Ho sees it, Seatrium is planning a “kitchen sink” writedown for FY2023. By doing so, the company is removing an overhang that had kept some investors concerned and paving the way for a steadier recovery ahead.
She expects Seatrium to enjoy a recovery in its operating performance and a pick-up in contract wins. The contracts from Petrobras to build two rigs P-84 and P-85 worth $4 billion each are of particular interest.
Trade publications had already reported that Seatrium is in direct negotiations with Petrobras over the two contracts as the other competitor, China Offshore Oil Engineering Cooperation, had withdrawn from the bid because of Brazil’s requirement for a certain level of local content. In contrast, Seatrium operates two yards within Brazil.
Ho had earlier expected Seatrium to win at least one of the two contracts. “The finalisation of the contract will be a near-term catalyst for Seatrium.”
Ho also notes that the write-down planned by Seatrium is non-cash and will not have an impact on the cash flow and the company’s gearing level should also remain healthy at less than 0.2 times now.
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In his sector note on Jan 30, Seatrium is among a list of offshore counters favoured by UOB Kay Hian’s Adrian Loh. “Our bullish outlook for the offshore marine sector remains unchanged with both shallow and deepwater assets marching well past 5–8-year highs, supported by a high oil price.”
In addition, Loh believes that the outlook for the offshore wind sector this year has improved relative to the instability seen last year, as governments, in their bid to push for renewable energy growth, lay down further favourable policies. “We remain optimistic that the industrials and shipyard sectors in Singapore can repeat their share price outperformance in 2024,” says Loh.
Specifically for Seatrium, he has kept his “buy” call and 19 cents target price, which is based on 1.5 times FY2024 book value of 12.5 cents. “Given the company’s exposure to the offshore marine upcycle, we strongly believe that Seatrium’s 2024F P/B valuation of 0.9 times is inexpensive,” says Loh.
