Seatrium Earnings: Hit by Provision for Contracts and Merger Expenses; Shares Expensive

The first-half 2023 net loss of SGD 264 million for Seatrium S51 was worse than expected, but this was largely due to a provision for contracts and merger expenses of SGD 231 million. Stripping these out, the firm should deliver positive EBITDA of SGD 258 million in first-half 2023 versus negative EBITDA of SGD 19 million a year ago, a commendable result. The firm guided that full-year 2023 will be loss-making. We keep Seatrium’s fair value estimate at SGD 0.12, and we forecast the firm to turn profitable in 2024. However, we think the shares are overvalued currently. We believe upside will need to be driven by significant new order wins and better-than-expected synergies generated from the merger with Keppel Offshore and Marine.

There were no major surprises for the results except for the provision for contracts and merger expenses. The provision was related to cost overrun for projects in the U.S., but management does not expect further provision going forward. Nonetheless, the firm will continue to recognize some merger expense, but the magnitude should reduce over time.

With strong order wins of SGD 4.3 billion in first-half 2023, Seatrium’s net orderbook was robust at SGD 19.7 billion as of end-June 2023. Project deliveries will last till 2030, underpinning the firm’s earnings visibility. Renewables and cleaner/green solutions account for about 40% of the net order book. Seatrium is currently working on multiple tender opportunities in various sectors, including oil and gas, offshore renewables, and other green solutions. We forecast Seatrium will secure average annual new order wins of SGD 5.5 billion during 2023-25, given improving order visibility on the back of the ongoing energy transition. The firm’s net gearing ratio improved to 0.17 times as of end-June 2023 from 0.26 times as of end-2022. We think the stronger balance sheet will support the firm to win more contracts.