Scrubbed clean, overhang removed
- Brazilian litigation overhang on STM has been largely removed. It reached an in-principal agreement with authorities with S$265m provisions made.
- S$1.795bn of provisions were made in 2H23 for write-down of non-core asset surplus, closure of yards, onerous contracts and Brazilian settlement.
- We estimate 2H23 core GM at 3-5%, on +53% hoh in turnover to S$4.4bn.
- Catalysts: order wins, improvement in margins. Risks: project cost overrun. Reiterate Add but reduce TP to S$0.14 (still 1.4x P/BV, reflecting FY23 BV).
S$1.795bn of provisions in 2H23, likely to be final
Seatrium (STM) recorded a net loss of S$1.7bn for 2H23; FY23 net loss of S$1.9bn was wider than our loss forecast of S$655m. Post-strategic review, a total of S$1.795bn of provisions were made for the write-down of the surplus of non-core assets, closure of yards, onerous contracts and Brazilian settlement (see Fig 1 for details). This included reaching a resolution with Brazilian authorities on Operation Car Wash, which resulted in a total provision of S$265m (S$183m for the Brazilian authorities and S$82m for Keppel Corp as indemnity). We believe most of the provisions are contained, pending the resolution with Singapore’s CPIB as the investigation is ongoing. STM is also proposing a 20:1 share consolidation pending AGM approval on 26 Apr 2024F. STM’s Investor Day will be held on 15 Mar 24.
Good revenue run-rate on order book of S$16.2bn
2H23 revenue came in at S$4.4bn (+53% hoh), mainly due to the recognition of the Pseries FPSOs for Petrobras, including the P-78 (delivery due in 2024F), P80 and P82 (delivery due in 2027F). Ship repair revenue in 2H23 rose 5% hoh to S$531m. Order book as at end-2023 stood at S$16.2bn, with order wins of S$4.5bn achieved in 2023. Including the third Tennet order recently announced, we estimate its current order book at S$18bn.
Gradual improvement in operating leverage
STM’s 2H23 core EBITDA margin came in at 8.4% (1H23: 8.9%). We estimate 2H23 core GM excluding provisions and write-downs to be in the range of 3-5% as the core gross profit amount was undisclosed. We keep our FY24F GM estimate of 5.5% but cut our FY25F GM to 8.5%, assuming a gradual pace of improvement. STM said legacy projects that are loss-making make up c.10% of its order book. Post write-down of surplus assets and yard closure, we estimate the full effects of the S$90m-100m in depreciation and amortisation savings to only kick in from FY25F as it takes time for yard closures.
Path to profitability remains by FY24F; lower TP to S$0.14
We keep our FY24F net profit largely unchanged but cut FY25F’s by 30%, mainly on lower GM and higher SG&A. Reiterate Add on strong orderbook and margin improvement. We reduce TP to S$0.14 (still 1.4x P/BV, reflecting FY23 BV). Re-rating catalysts: two units of FPSO orders from Petrobras (US$2.8bn-3bn/unit), drilling rigs orders and more HVDC contracts from Tennet, clarity on returns/synergy savings. Key risks: order cancellations impacting revenue recognition, and project cost overruns affecting profitability.
