Charting a Growth Course
- 3Q revenue surged to >$2bn, beating expectations; a positive indicator for margin recovery
- Offshore renewable projects on orderbook intact while US offshore renewables hit roadblocks; European seems to be progressing well
- Strategic review to be concluded year-end but released in 1H24; contract wins remain key catalysts
- Attractive risk-reward; reiterate BUY with TP S$0.18
Revenue in 3Q beat expectations, a positive indicator for margin recovery. STM generated over S$2bn revenue in 3Q23, taking a cue from the orderbook decline to S$17.7bn (from S$19.7bn last quarter). This is significantly higher than market expectations and the average quarterly revenue of over S$1.4bn in 1H23. Management attributes this to good progress of yard integration combined with project execution. We see the higher yard activity level as a positive indicator of margin recovery 2H23 onwards.
Encouraging order wins YTD amounting to S$4.3bn. While there haven’t been any new orders secured in 3Q, STM won S$4.3bn worth projects in 1H23. New wins comprise largely of contracts for two High Voltage Direct Current (HVDC) electrical transmission systems for TenneT – a leading European grid operator – estimated at S$3.3bn, and an Empire offshore wind farm substation worth c.S$500m.
Enquiry level and order pipeline remain buoyant. STM is well positioned to benefit from the robust demand for FPSOs and European offshore wind assets. STM has distinctive value propositions – engineering capability, cost efficiency, access to financing, track record, and with headquarters in Singapore.
The third TenneT HVDC contract, which we estimate to be worth S$1.6-1.8bn, stands a good chance to become effective in the next few months, following good progress at yard for the first two units. In addition, there is more to come as TenneT has ambitious plans to build 60GW of offshore wind capacities by 2030 (28GW awarded thus far) and 300GW by 2050.
STM is one of two front-runners for Petrobras’ P84 & P85 FPSOs, valued at approx. S$4bn each for the Atapu and Sépia fields, which are the sixth and fifth-largest in Brazil. The other bidder is China Offshore Oil Engineering Corporation (COOEC). STM is widely expected to win at least one FPSO order. The tender is going well and was expected to be awarded by year-end, but due to the complexity of the project, is still currently undergoing technical clarification. Prospects for FPSO remains bright. From 2023 to 2030, Rystad had forecasted 48 FPSO deals for new greenfield developments.
STM is also pursuing projects for Floating LNG (FLNG) and Wind Turbine installation Vessels (WTIV), which typically cost S$500m-1bn. There are also increased inquiries for reactivations / upgrade of jack up rigs given the spike in utilisation and day rates.