Seatrium – Laggard pick

Excerpts from CGS International report

Seatrium Limited (SGX: 5E2)

• We hosted Seatrium (STM)’s management in KL recently. We remain positive on the group’s efforts to improve margins and profitability.
• Most FAQs by investors were on: 1) the progress of legacy projects and further provisions, 2) order outlook, and 3) CAD/MAS information requests.
• Seatrium remains a country top pick given its YTD underperformance. In a market where laggards could prevail, positive newsflow could be a catalyst.

Reiterate Add and TP of S$2.69, still based on its 10-year average trading band of 1.5x CY24F P/BV. Key risk: significant project cost overrun

Share price underperformed despite core operating improvement

Seatrium (STM) delivered a 248% hoh improvement in its 1H24 core earnings, thanks to its aggressive cost savings in SG&A, in addition to improving core gross margins. However, its share price has underperformed by c.7% since its results announcement on 2 Aug 24. We attribute this to the market’s lack of confidence in STM’s ability to improve its core gross margins and concerns of further provisions for onerous contracts. However, STM is our top pick for a strong turnaround in 2H24F, with an estimated 184% hoh increase in net profit.

Legacy projects: attempts to minimise provisions

Legacy projects are being defined as the two loss-making contracts in the US:

• a high specification trailing suction hopper dredger (TSHD) for Manson Construction, and
• a wind turbine installation vessel (WTIV) for Dominion Energy due for delivery end 2024F/early-2025F.

We estimate the remaining contract value for these projects to be c.S$160m-S$200m, with projected gross loss margins of 15-30%. Management is putting a strong emphasis on project management and attempting to minimise further provisions. 1H24 provision for onerous contracts amounted to S$70m. Shortage of labour, such as welders, would result in cost overruns, in our view. We understand that SpaceX, which also requires welders, has set up its new office and industrial factory in Brownsville, Texas (SpaceX Starbase Office).

Can MAS/CAD overhang be removed?

Management reiterated that the investigation by the Monetary Authority of Singapore (MAS) and Commercial Affairs Department (CAD) is not a fresh allegation and that STM is continuing to provide its full cooperation to the Singapore authorities. We believe the investigation could be related to past statutory disclosures.

Sizeable orders could be near-term catalysts

We believe STM could be finalising a contract with BP for its Kaskida floating production unit (FPU) in the US Gulf of Mexico — BP had achieved a final investment decision on the project in Jul 24 and expects production to start in 2029F. STM was awarded a letter of intent for the engineering, procurement, construction and commissioning for the project in Jun 24. We now estimate the contract size to be in the range of US$600m-700m. Mediumterm projects in the pipeline could include HVDCs from 50Hertz Germany and Tennet.

Valuation/Recommendation

Reiterate Add and TP of S$2.69. While we expect all capital goods sector plays to deliver yoy earnings growth for 2H24F, we think STM could post one of the strongest hoh earnings growth of 184%. This is on the back of an improvement in gross margin, lower provision for onerous contracts, and potentially lower financing costs. Seatrium share price chartYou can find the full report here and the company website here.