• Strong 1Q23 operational performance with spectacular order wins and strengthened balance sheet on schedule deliveries and good progression of existing projects
• Net orderbook of c.S$20bn as of end Mar-2023, with 39% from renewables and cleaner solutions, providing good revenue visibility for next 3-years
• Strategic review, to be concluded by year end, should cover integration plan and capita structure review for sustainable growth ahead
• Positive catalysts stemming from order wins and earnings turnaround we currently have a BUY call with S$0.14 (1.2x PB)

 

Seatrium (STM)&rsquo s management provided an upbeat outlook guidance during the 1Q23 analyst briefing. Key questions revolving strategic review, profitability, and order wins and here are the key takeaways:

 

A more holistic strategic review.  Merger of two big shipyard groups &ndash Sembcorp Marine (SMM) and Keppel O& M (KOM) was a massive exercise. Post completion of the deal, both teams have had thorough discussion on integration planning, which will feed into bigger strategic review that shall be concluded by end of year. There will be revenue and cost synergies to be harnessed. In the near term, management will focus on project execution and the first key financial to look at would be EBITDA positive. In addition, STM would also review capital structure of combined yards, such as debt, and cashflow, to ensure sustainable structure for longer term growth of STM. Net gearing has improved further from 0.26x as of end 2022 to 0.18x as of end Mar 2023.

 

What would profit margins be?  Management remains pretty tight-lipped about margin assumption and guidance. Though, they are optimistic on a turnaround given the higher activity level, integration synergies and favourable industry momentum. STM has taken a look at all projects. If execute well, they shall accrete positively to bottomline. Projects are assessed based on return and risks, not on a fixed margins. Recall that in the last peak around 2010, KOM and SMM made double digit net margins as high as 18% on the back of their leading market share in higher margins jackup rigs, conversion projects and repairs. Given the different order mix towards turnkey projects which has higher revenue base but lower margin, and competition landscape, we surmise that net margin could recover to 5-10%, implying 5-10% ROE. 

 

Order outlook seems brighter than ever. STM won c.S$5.3bn new contacts YTD, based on our estimate, making up 88% of our full year assumption of S$6bn, ahead of expectations. This lifts orderook to c.S$20bn (39% renewable/cleaner energy solutions), providing good revenue visibility for next 3-years. It is still actively chasing new orders such as Petrobras&rsquo P84 & P85 FPSO newbuild tender, which fit STM&rsquo s current production schedule perfectly. Investment for offshore winds side continue to be growing rapidly especially in Europe and US. STM is eyeing the substations and wind turbine installation vessel (WTIV) projects. It continues to have slot for new projects leveraging on eco-system of partners and overseas / satellite yards. Overall offshore market has improved, shifting towards risk-sharing mechanism in contract clauses and cash-flow neutral milestone payments. Yard capacity is tight for both marine and offshore solutions. With very strong order backlog, STM has the flexibility to cherry-pick higher value add projects.

 

Overall, fundamental of STM has improved vastly. While integration and execution of these new projects remain to be seen, higher yard utilisation typically translate to better efficiency and margins. Strong order momentum continues to take center stage in the near term. There should be more upside than downside to street&rsquo s low expectations, projecting STM to post a net loss for FY23 and turn around with small profits in FY24. We currently have a BUY call with S$0.14 (1.2x PB).