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Is Seatrium’s $1 bil ebitda target ‘ambitious’ or ‘conservative’?

Felicia Tan
Felicia Tan • 9 min read
Is Seatrium’s $1 bil ebitda target ‘ambitious’ or ‘conservative’?
An aerial view of Seatrium's solar panels and its Goliath twin cranes. Photo: Seatrum
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Chris Ong, CEO of Seatrium, recognises the importance of symbolism as he describes how the enlarged company, refreshed and recapitalised, deserves more attention from the investment community. “Today, we are no longer green or red,” says Ong, referring to the respective corporate colours of Sembcorp Marine and Keppel Offshore & Marine. “We are an electric blue Seatrium.”

Speaking to the media, analysts and investors at Seatrium’s inaugural investor day on March 15, Ong announced its goal to achieve consistent ebitda of over $1 billion by FY2028, which he admits is “very very ambitious”. For context, the company reported ebitda of just $236 million in FY2023 ended December 2023, continuing its turnaround from the multi-year industry downcycle.

As part of Seatrium’s merger, it booked a massive $2 billion impairment for surplus assets and provisions, pushing the company into a net loss of $1.94 billion for FY2023. The impairment includes a $182.4 million “leniency agreement” with Brazil to conclude a massive long-running corruption probe dubbed Operation Car Wash. By doing so, Seatrium can put this episode behind and actively bid for new projects, including two rigs reportedly worth $4 billion each, from repeat customer Petrobras.

Seatrium CFO Adrian Teng says the ebitda target will be realised through three means. First, the group will finish the bulk of its unprofitable “legacy projects” by the end of this year. Second, the company, tapping on its integrated processes and systems, will execute its contracts more productively and efficiently. Third, Seatrium will rationalise its cost structure with a more streamlined asset base, with a target of $300 million in cost savings to be fully realised regularly by the end of 2025. Teng says that the company will also negotiate for improved contract terms, including better risk-sharing with customers, with an eye on improving its cash flow profile.

Seatrium is aiming for a higher top line too, with a target of between $10 billion and $12 billion in revenue by FY2028, up from $7.29 billion in FY2023.

While both SembMarine and Keppel O&M were known for their near duopoly in building oil rigs in their heydays, Seatrium is aiming for a more diversified and resilient portfolio mix oil & gas, renewables, repairs and upgrades, as well as carbon capture and storage (CCS) & new energy projects.

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While the renewables segment is still relatively small compared to oil and gas in FY2023, the unit is seen to “grow exponentially” in five years to be comparable to oil & gas, contributing the bulk of Seatrium’s revenue last year. “As we see significant opportunities in the near term, we expect oil and gas revenue to remain sizeable even five years out, although the contribution to our overall top line will be smaller,” says Teng.

In addition, the relatively low-profile and seemingly mundane business of repairs and upgrades is deemed to be “very interesting” and is expected to grow steadily as Seatrium expands its global shipping reach and increases its value add, he says.

Teng adds: “While revenue contribution from new energy and CCS looks relatively immaterial in five years, we are very excited by the potential opportunities from these segments. And we expect its contribution to increase towards 2028.”

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With the higher profitability and healthier cash flow, Seatrium is also aiming for a return on equity (ROE) of over 8% by FY2028, a net debt over ebitda of two to three times and gross margins across all segments in the mid-teens. “Coupled with synergies from the combination and further cost optimisation on cash and capex (or capital expenditures), we expect to see margin uplift over time,” he says.

Conservative targets

Market reaction to Seatrium’s targets articulated on March 15 was not positive. The stock was sold down 14.13% to close as low as 7.9 cents on March 20, valuing the company at $5.39 billion. Year to date, the stock is down a third.

Analysts like Peggy Mak of PhillipCapital are wary that Seatrium’s net debt target of two to three times Net debt/Ebitda means its net borrowings may rise to $2 billion–$3 billion from $750 million as at end-FY2023. Unless Seatrium’s order book can rise at the same pace or faster, taking on more debt in an environment where interest costs are higher y-o-y “does not bode well for margins”, says Mak.

Other analysts are staying positive about the company. “We believe these targets are conservative,” says Rahul Bhatia of HSBC Global Research, who sees positive trends including costs trending down to help Seatrium achieve its targets by FY2026 instead of FY2028. He has kept his “buy” call and 14 cents target price.

DBS Group Research’s Ho Pei Hwa calls the targets “promising”. The revenue growth target, for example, represents a five-year CAGR of 7%–10% and will be backed by robust demand for oil and gas and renewable infrastructure. “In addition, Seatrium is also building up capabilities in CCS and new energies, potentially a longer-term growth engine,” says Ho in her March 18 note.

Seatrium’s share price traded at a high of 15 cents last September but has since fallen after a spate of offshore wind project cancellations, delayed contract awards, and writedowns, including provisions for Operation Car Wash. Ho believes that the worst is over. The restoration of confidence in Seatrium’s business, with ongoing momentum for new order wins in renewable energy, is also positive for the group, she says.

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“We expect to see operational improvements, the outlook is bright for order wins in both conventional energy and renewables/new energies,” says Ho, who has kept her “buy” call, and target price of 15 cents, which is based on 1.5 times Seatrium’s FY2024 P/B.

“We believe 40% of the re-rating could come from the earnings turnaround and 60% from an uplift in the valuation multiple from 0.9 times P/B towards 1.5 times P/B, on the back of the robust order momentum, integration synergies, and solid management execution,” she adds.

CGS International’s Lim Siew Khee is equally upbeat, as Seatrium will be completing older, loss-making projects by the end of this year, while moving forward with newer orders secured after the pandemic, with double-digit margins largely in the bag. Lim agrees with Seatrium’s plan to take on more repair and upgrade jobs, which she says will yield higher margins of 20% and above. All in, Lim expects Seatrium’s gross margins to exceed 10% by FY2025, although she has kept her “conservative” forecast of 9%. As such, she expects Seatrium to hit the $1 billion ebitda target in FY2026, two years earlier than what was guided.

On the other hand, Lim expects Seatrium to grow its repair revenue and upgrades from $1 billion last year to $1.3 billion by FY2026, as shipowners send their vessels for retrofits to make them more efficient as part of the wider decarbonisation trend.

Contribution from the renewable energy segment was “immaterial” in FY2023 as contracts such as those from TenneT have yet to contribute significantly. Nonetheless, Lim estimates that with 39% of its total order book filled by such projects, there is potential for renewable energy to account for half of the $10 billion–$12 billion revenue target.

Lim has kept her “add” call on the stock, along with a target price of 14 cents based on 1.4 times FY2024 P/B, which is the average trading range from January 2015 to December 2023. “Order wins remain a key catalyst for the stock. Seatrium also shared that there will be minimal capex in the next few years, while a share buyback could be a possibility,” she writes.

Similarly, UOB Kay Hian’s Adrian Loh believes that the FY2028 ebitda target should be “eminently achievable”, given how Seatrium’s underlying ebitda for FY2023 was already at $628 million in FY2023. Seatrium’s FY2028 revenue target, which implies an annual new order win rate of $4 billion–$5 billion based on Loh’s estimates, is also “achievable” after factoring the company’s $4.5 billion new order wins in FY2023.

Like CGS’s Lim, Loh sees the repairs and upgrades segment as the one to watch given its large annual addressable market size totalling $20 billion–$30 billion. “[This is] importantly non-cyclical given that ships need to be either repaired or upgraded at least every three to five years,” he points out.

Seatrium, according to Loh, is aiming to grow this segment by three to four times in the next five years. Tankers and cruise ships, where 75% and 79% respectively of the global fleet are more than 10 years old, are key sources of demand.

Loh has also maintained his “buy” call on Seatrium with a target price of 15.1 cents, which is based on 1.5 times the FY2025 book value of 9.7 cents, which is 2 standard deviations (s.d.) above the company’s five-year average of 1.1 times. “Given the company’s exposure to the offshore marine upcycle, we strongly believe that Seatrium is inexpensive, trading at -1 s.d. below its mean,” he adds, referring to Seatrium’s share price of 9 cents as at his report dated March 18.

For Loh, one of Seatrium’s standout accomplishments in 2023 was its successful balance sheet restructuring. During the latter half of the fiscal year, it secured $3.5 billion in new loans, refinancing and trade financing. “By replacing short-term working capital loans with more flexible and committed instruments, [Seatrium] was able to increase its undrawn facilities from $0.4 billion to $2 billion as well as lengthen its average loan maturity by two years to FY2026 and beyond,” he notes.

Seatrium is expected to spend more on technology to keep up with the energy transition ecosystem or even break into new business segments. “For example, it will need to look at potential new technology and intellectual property (IP) for its renewables segment with Seatrium showcasing floating wind substations and foundations to capture value in the near to medium term,” says Loh.

While Seatrium is currently working with multiple consortiums for its CCS and new energies segment to develop the future hydrogen value chain, says Loh, it should also be able to leverage its proprietary designs within its oil and gas business to strengthen its track record.

OCBC Investment Research’s Ada Lim has retained her “buy” call and fair value of 16 cents, as she sees Seatrium’s targets as “reasonable and achievable”. In her March 18 report, Lim notes that Seatrium’s 20-to-1 share consolidation exercise will help shed its “penny stock” status and reduce share price volatility. This could garner more interest from institutional investors, given the lack of comparable players in Singapore, she says.

Following the resolution of Operation Car Wash, the OCBC analyst believes that the stock’s overhang is largely removed, making it “well positioned” for a turnaround. Key risks would be management’s ability to execute and lower-than-expected order book wins.

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