Seatrium shares bounce with S$11 billion order. Is it poised for a recovery?

What happened?

Seatrium’s share price has been very volatile in recent weeks. 

The shares surged following the completion of the share consolidation earlier this month.

Thereafter, the shares fell sharply on the announcement that Seatrium will be excluded from the MSCI Singapore index.  

Earlier this week, Seatrium’s share surged on news that it has secured a S$11 billion order from Petrobras. 

Seatrium recently provided its first quarter business update. Let us dive deeper to find out more about the fundamentals of Seatrium. 

What you need to know about Seatrium’s first quarter business update

Seatrium provided business update for 1Q24. No financial details were revealed.

• Orderbook grew to S$25.8 billion mainly driven by contract win of 2 FPSO platforms from Petrobras

• Delivered an LNG bunker vessel and completed 67 repairs and upgrades projects

• Divested the yard in the Philippines

• To pay US$176 million in settlement of the arbitration commenced by MH Wirth

#1 - Orderbook grew 59% from S$16.2 billion at end FY23 

Seatrium secured S$11.4 billion in new orders year-to-date, including the two FPSO platforms worth S$11 billion awarded by Petrobras. Construction will commence in 2025, to be delivered in 2029.

Net order book stands at S$25.8 billion, comprising 31 projects with deliveries till 2030. Of these, it has 6 FPSOs to be delivered to Petrobras, which we estimate make up about 80% of total orderbook. The high customer concentration is not alarming, given the limited number of players in this sector.

In addition, Seatrium secured S$350 million worth of orders for repairs and upgrades (R&U) in 1Q24, to be completed by end 2025.

Offshore production activities and windfarm installations have picked up with firmer crude prices, fueling demand for offshore drilling and production equipment. 

According to the management, equipment owners are more inclined to repair and upgrade existing equipment, rather than placing newbuild orders. This could be due to higher costs, longer construction lead time and the uncertain outlook for crude demand. 

#2 - 1Q24 activity appears to have slowed from 2H23

Seatrium booked milestone order delivery of S$1.43 billion in this quarter, going by the movement on outstanding orders. 

Assuming it clocked a revenue of S$250 million from repairs and upgrades, total revenue for the quarter is estimated at S$1.7 billion. 

This is lower than the average quarterly revenue of S$2.2 billion in 2H23.

During the quarter, it delivered an LNG bunker vessel and completed 67 repairs and upgrades projects.

#3 - Divestment of the Batangas Yard in the Philippines 

Seatrium announced the divestment of the Philippines yard at above book value. 

This kickstarts its asset base rationalization effort announced at the March Investor Day. 

It targets to achieve annualized cost savings of S$300 million in 2028, and achieve a return on equity of more above 8.0%.

#4 - To pay US$176 million as settlement of arbitration commenced by MH Wirth

In April, the court ruled that Seatrium is liable to pay to MH Wirth termination fees of US$101 million and ancillary costs of US$7 million. 

The total amount of US$108 million has been provided for previously.

In addition, it will pay US$68 million as full and final settlement to resolve the interest payable and outstanding issues. This will be booked in FY24.

What will Beansprout do?

After six consecutive years of losses, the burning question is whether Seatrium will turn around in FY24.

However, the prospects still appear fairly mixed. 

Seatrium has a mix of lower margin legacy orders as well as higher-margin new order, which may impact its profitability for 2024. 

As at end 2023, it has S$400 million of low-margin legacy orders which will be completed in FY24. At the same time, its new contracts could command better margins and start to contribute from 2H24.

On the cost front, the rationalisation of asset base might incur redundancy costs in the near term. On the other hand, it is lowering the cost of debt through securing a S$400 million committed Green Revolving Loan Facility on top of over S$2 billion in sustainability-linked loans, while it redeemed the higher-cost S$500 million floating rate bonds due in 2026. 

In the near term, we will be watchful of any potential price pressure as Seatrium will be excluded from MSCI Singapore Index from 1 June 2024. Fund managers whose performances are measured against this index and ETFs which mirror the index might reduce their stakes in Seatrium.

Join the Beansprout Telegram group for the latest insights on Singapore stocks, REITs, bonds and ETFs.

Related links:

• Seatrium share price and analysis