Steady As She Goes
STM’s 3Q23 business update did not contain any negative surprises with its risks to offshore wind well overstated. Its current orderbook stands at S$17.7b with 40% of this being green-energy related. At 2024F P/B of 0.9x, STM’s valuation remains inexpensive for a company that is facing an offshore energy and energy transition upcycle. Maintain BUY. Target price: S$0.19.
WHAT’S NEW
• An operationally steady 3Q23. Seatrium provided a 3Q23 update that showed continued solid execution of its current suite of projects. During the quarter, the company delivered four projects – the Whale Floating Production Unit for Shell, the AlSila and AlSaadiyat jack-up newbuilds for Abu Dhabi National Oil Company (recall that these were previously Borr Drilling’s jackups), and the Almirante Tamandaré FPSO for SBM.
• No impact from the wind industry’s travails at present. On the analyst call, management stated that it is not affected by the issues buffeting the offshore wind industry at present given that these issues are confined to the east coast of the USA. In any case, STM pointed out that all of its contracts are cashflow neutral given that it is paid based on milestones, and will not suffer in the event of a cancellation. Specifically on Ørsted, STM noted that its Revolution Wind project offshore Connecticut and Rhode Island has achieved final investment decision and the Changhua projects are progressing well, while discussions are ongoing regarding its Empire Wind project. In Europe, the offshore wind industry appears more stable given that STM’s exposure is via national grid operators such as RWE and TenneT, which are very focused on energy transition.
• Repairs & upgrades segment – kicking goals. In 3Q23, STM completed 73 projects in this business segment, which brings the total number of projects completed in 9M23 to 217. On the call, it was noteworthy that the company remains ambitious and optimistic on this segment, especially now that Singapore only has a single yard attracting business instead of two entities competing for work. Looking out into 2024 and beyond, STM highlighted that it will start to move away from pure repair and instead facilitate energy transition via vessel upgrades (eg installation of decarbonisation technology) and new technology deployment. With new rules and regulations from the International Maritime Organisation, the demand for dual-fuelled vessels will increase and thus STM will face a long runway for technology deployment in our view. In addition, this segment should see incremental demand for the reactivation of drilling rigs as utilisations exceed 90%.
STOCK IMPACT
• Addressing the key issues affecting the broader industry. While some companies have been negatively affected by the wind industry’s supply chain, management was sanguine given that it is partnered with Hitachi and GE for switchgear and transformers while issues with wind turbines are not applicable to STM. Overall renewables industry costs have spiked given the high inflationary environment and higher interest rates; however, the company pointed out that it is actively engaging with its clients and also looking at its own cost structure. Interestingly, management stated that the combination of Keppel Offshore Marine and Sembcorp Marine has given rise to an extensive database of suppliers and providers
which have good track record to navigate these cost challenges.
• STM’s new order pipeline appears to have decent upside potential, especially for energy transition projects. With its current blue-chip client base, which includes TenneT, Petrobras, Modec, Shell and SBM, and a wide range of production-centric products such as FPSOs, FLNG vessels and wind turbine installation vessels, the company is focused instead on quality orders going forwards. For FPSOs in particular, the outlook for oil & gas production appears strong and thus such vessels will be needed for offshore Brazil and Guyana. Management however again cautioned that while the drilling market is very active, a repeat of a super-cycle volume of jack-up orders is unlikely.
• With Borr’s receivables extinguished, Transocean is next. On 7 Nov 23, STM announced that Borr Drilling had prepaid S$968m in receivables that was due in 2025. With this out of the way, STM only has Transocean’s S$580m in receivables left with full amortisation by 2027. In addition, the company saw a qoq improvement in its net gearing from 0.17x to 0.15x as at end-3Q23.
• Strategic review. The company is on target to complete its strategic review by end-23 with the results to be announced at its Capital Markets Day in 1H24. As part of this review, the company will be looking at how to manage its debt to get the best cost of capital with management commenting that it will explore opportunistic technology investments for its future growth. In addition, part of the strategic review will look at the company’s capital structure; thus, we believe that a share consolidation, which will need to be approved at an AGM, is inevitable although STM stated that it has “a lot of options” and that “nothing (is)
conclusive”.
EARNINGS REVISION/RISK
• None.
VALUATION/RECOMMENDATION
• We maintain our BUY rating on Seatrium with a P/B-based target price of S$0.19. Our target P/B multiple of 1.5x is 2SD above the company’s five-year average of 1.0x and is pegged to its 2024 book value of S$0.125. Given the company’s exposure to the offshore marine upcycle, we strongly believe that Seatrium’s 2024F P/B valuation of 0.9x is inexpensive. Risks include higher-than-expected provisions for 2023, negative newsflow regarding its CPIB case and volatile oil prices.
• Maintain sector view at OVERWEIGHT. We continue to like Seatrium as we believe that the company will benefit from stronger offshore marine dynamics as well as demand for offshore vessels and structures related to the renewables industry. In addition, the normalisation of economic activity should result in a greater volume of shipping activities and thus positively impact its repairs/upgrades segment. While 40% of Seatrium’s current orderbook is in the renewable energy space (with the remainder related to oil and gas projects), its addressable market is arguably much larger when taking into account carbon capture usage and storage, floating LNG, and ammonia storage and transport which feeds into the hydrogen energy chain.
SHARE PRICE CATALYST
• New orders for rigs, offshore renewable installations or fabrication works as well as repairs and upgrade works for cruise ships and other commercial vessels.