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Citi upgrades Seatrium after bagging long-awaited Petrobras contracts

Felicia Tan
Felicia Tan • 4 min read
Citi upgrades Seatrium after bagging long-awaited Petrobras contracts
Seatrium's solar panels at its Tuas yard. Photo: Seatrium
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Citi Research analyst Luis Hilado has upgraded Seatrium to “buy” after the group bagged $11 billion worth of contracts from Petróleo Brasileiro S.A. (Petrobras), Brazil’s national oil company. The contract “significantly boosts” Seatrium’s net order book, which stood at $16.2 billion as at the end of FY2023.

On May 25, Seatrium announced that it won an international tender from Petrobras for the newbuild supply of floating production storage and offloading (FPSO) vessels platforms P-84 and P-85. The high throughput FPSOs will be deployed in the Atapu and Sepia fields in the eastern part of the Santos Basin, some 200km offshore of Rio de Janeiro.

The vessels will be constructed over 1QFY2025 to FY2029.

“We believe that although the contract has been generally expected and recently discussed, the market was awaiting the finalisation and thus has not fully priced in the event,” writes Hilado in his May 26 (Eastern time) report.

“Likewise, the contract size is a positive surprise that has led us to increase our order book win assumption for FY2024 from $9 billion to $15 billion,” he adds.

Following the contract win, the analyst has raised his revenue and ebitda forecasts, especially for FY2025, to reflect the higher assumptions. However, he has “toned down” his margin assumptions for the medium term. That said, his revised estimates on the whole, are above the Bloomberg consensus at this point.

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“We believe that consensus estimates will also head north given the confirmation of the major win. We await the 1QFY2024 results on May 28 to assess our assumptions anew, but believe the market will now be discounting the US$68 million ($91.6 million) arbitration-linked interest that will drag reported profits,” he writes.

Hilado has also raised his target price to $2.16 from $1.96 previously.

“We believe the overhang from impairments and arbitration that impeded the stock previously is likely priced in. Meanwhile, the new contract win dwarfs the $250 million contract cancellation earlier this year,” he says.

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“As such, we are moving our valuation methodology from a price/net tangible assets or NTA (that accounted for impairment risks post merger) to a price/book basis,” he adds. “Even at a 10% discount to peers at 1.1 times, the stock is currently offering healthy upside potential and hence we upgrade to a ‘buy’.”

At the same time, CGS International (CGSI) analysts Lim Siew Khee and Meghana Kande have kept their “add” call ahead of Seatrium’s business update on May 28.

While there will be no revenue or earnings mentioned in the update, the analysts expect the group to report an order book of about $15 billion.

“We build in a base case of $12 billion of order wins for FY2024, assuming Seatrium wins both P-84 and P-85 FPSOs,” say Lim and Kande in their May 24 report, before Seatrium’s FPSO win announcement.

“Including TenneT’s third 2GW high voltage direct current (HVDC) contract worth $1.8 billion, we estimate order book could stand at $17 billion,” they add.

Year-to-date (ytd), the analysts peg Seatrium’s order wins to be at around $2.5 billion.

For the FY2024, Lim and Kande still expect the group to make a loss to the tune of $30 million. Their core profit estimate has been lowered to $64 million from $94 million previously after Seatrium said that it will pay US$68 million to MH Wirth as a full and final settlement to resolve any outstanding issues from the award.

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While the US$108 million was provided for in FY2023, interest will be booked in FY2024. As a result, the analysts have lowered their core earnings per share (EPS) estimates by 32% for FY2024. Their EPS estimates have been lowered by 1% and 3% respectively for FY2025 and FY2026 respectively.

“Our thesis of path to profitability is intact albeit on a core basis as Seatrium completes loss-making legacy projects in FY2024,” say Lim and Kande. “Seatrium delivered a core profit of $15 million in 1HFY2023, improving to $33 million in 2HFY2023”.

The analysts’ target price has also been lowered to $2.62 from $2.68 previously, still based on 1.5 times FY2024 P/B.

Despite this, the analysts remain optimistic on Seatrium, as the group is the only large-cap proxy in Asean to benefit from global offshore & marine capex cycle.

As at 12.14pm, shares in Seatrium are trading 19 cents higher or 12.34% up at $1.73.

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