Dear all

The past week is filled with numerous earning calls and meetings. This article is written on 29 Feb with all data correct as of 29 Feb. In the interests of time, I decide to publish this article on my blog as per what I wrote to my clients on 29 Feb.

Seatrium has fallen 15% from $0.104 on 21 Feb to trade $0.088. It reported results on 26 Feb morning. Given current low price and the upcoming investor day on 15 Mar, Seatrium seems to be an interesting stock worth a closer look. I have summarised the basis and risks here.

First, a summary of results

FY23 revenue was S$7.3b vs S$1.9b in FY2022.

FY23 EBITDA was S$236m vs negative EBITDA of S$7m in FY22.

Excluding exceptional items, FY23 underlying EBITDA jumped 456% y/y to S$628m from S$113m in FY22.

FY23 net loss was S$1.9b vs S$261m in FY22.

Excluding exceptional items, FY23 underlying net loss was S$28m vs S$141m in FY2022.

Basis – why I think it is worth a closer look

A) Worst is likely over

Based on CGSI Research and Company, 2H23 write-downs and provisions totalled S$1.8b include:

– S$112.5m write down of inventories

• S$867m write down of property, plant, equipment
• S$278m write down of Right of use assets
• S$88m write down of intangibles
• S$17m write down of associates
• Approx S$148m merger expenses
• S$285m provision for litigation

Suffice to say that Seatrium has done a kitchen sink in FY23 (i.e. whatever provision or expenses, if they can, they would have thrown into FY23, so that FY24F can start on a clean slate). In other words, the worst is likely over.

B) New order win prospects remain strong

Based on the reports that I read, management is upbeat on their orderbook prospects. The company is awaiting results of a tender for two Petrobras FPSOs contracts with a total value of around US$5.6 – 6bn. Prospects remain bright and market has previously pushed Seatrium to a high of $0.147 last year on optimism that Seatrium can win some contracts. Besides Petrobras, there may be contracts for drilling rigs orders and more High Voltage Direct Current (HVDC) contracts from Tennet. One HVDC contract is around EUR2b.

C) Investor day on 15 Mar – What will they say?

I suspect Seatrium may give more colour on their prospects in FY24F and beyond. In addition, management may share the impact from the cost cutting measures which they have taken and may be taking and impact on their kitchen sinking provisions made in FY23 on FY24F numbers. I.e. How does what they have done in FY23 and FY22 help their operating performance in FY24F. Basically, suffice to say that company is likely to share positive things with the investment community.

D) Sembcorp investor day on 6 Nov 2023 – how does its share price perform?

As one of my reasons for entry in Seatrium is that share price may appreciate somewhat from the current level $0.088 in the next one month, due in part to its investor day on 15 Mar, it makes sense to see whether share prices of other companies move due to such event.

Sembcorp industries’ investor day was on 6 Nov 2023. If we have bought two weeks before 6 Nov (23 Oct), the return would have been around 7.4%. If I compare the share price performance on 7 Nov (one day after its investor day) vs 23 Oct, the share price appreciation is around 14.2%. It is noteworthy that Sembcorp Ind has already been releasing a lot of good news before this investor day.

I suspect if Seatrium can release a couple of positive news (such as contract wins from Petrobras etc), the positive reaction to the share price is likely to be much larger than Sembcorp Industries, especially when Seatrium is trading near a one-year low price.

E) Share price is trading near one-year low level

1 year price range is 0.085 – 0.147. Seatrium is trading at $0.088 at the moment with almost all negative announcements having been announced.

F) Analysts are positive with an average target price $0.16, reduced from $0.17 before the results

Recall that I have mentioned analysts are likely to reduce their target prices in Seatrium especially if they ascribe a multiple to Seatrium’s book value per share (Click HERE for my previous article). Based on Figure 1 below, notwithstanding the slight reduction in consensus’ target price, average analyst target price for Seatrium stands at around $0.160. This still offers a potential capital upside of around 82% should the consensus be right.

Figure 1: Average analyst target price $0.160, potential capital upside of around 82%!

Source: Bloomberg (28 Feb 24) This screenshot was taken on 28 Feb when Seatrium was trading at $0.090.

Risks

Besides the usual business risks (such as cost overruns; order deferments or cancellations), I have listed some risks below. It is noteworthy that the below risks are only some examples of risks which may face in investing in Seatrium and it is not a complete list of risks.

A) Investigations at Singapore side are on-going

CGSI believes most of the provisions are contained, pending the resolution with Singapore’s CPIB as the investigation is ongoing regarding Operation Carwash. My personal take is that Singapore government may not punish Seatrium too severely. Furthermore, if these investigations end, then it may arguably provide a lift to Seatrium’s share price as another uncertainty is removed.

B) Share consolidation may reduce speculation

Some market watchers believe that share price consolidation (every 20 shares consolidated into one share, fractional entitlements to be disregarded) may reduce punters in this stock. Notwithstanding this, worries over this potential share consolidation have been around for at least one year. My personal view is this is good as it removes another overhang.

C) Volatile share price

Seatrium traded in a range $0.086 – 0.094 yesterday and is rather volatile. Such price volatility may not be suitable for risk adverse readers. Nevertheless, I suspect $0.085 – 0.088 should be a good support region.

D) Weak share price may portend other negatives?

Personally, I do not have an answer for this. Analysts who follow Seatrium for years may also not know this. I suspect even Seatrium’s management may not know for sure as their work covers various geographies and with different customers. What we can do is to manage the risk by doing careful position sizing in this stock and we try not to rush in at elevated levels.

Conclusion

Clients who have followed my previous article on Seatrium (Click HERE), they have already been notified that I have taken profit after Seatrium announced contract in the week of 19 Feb. I have now bought back in for the reasons highlighted above with a clear view of the potential inherent risks in Seatrium. Do note that there are always risks involved in trading and investing. Readers are encouraged to refer to Seatrium’s announcements on SGX (HERE) and its analyst reports (HERE).

P.S: I have earlier informed my clients on Seatrium around 28 – 29 Feb. The article above is written with data correct as of 29 Feb. I am vested for trading only. Readers who are keen to find out more on how to be my client can click HERE.

Disclaimer

Please refer to the disclaimer HERE