Analysts from CGS-CIMB Research, Citi Research and DBS Group Research are keeping their estimates and target prices unchanged after Seatrium announced a project cancellation on Jan 4.
CGS-CIMB analyst Lim Siew Khee has kept her “add” call and target price of 19 cents, estimating that the ebit impact of the cancelled project will be at around $20 million to $30 million in total for Seatrium’s FY2024 ending Dec 31 performance, or around $7 million to $8 million per annum (p.a.) assuming high-single-digit ebit margin of 7% to 8%.
The cancellation, in Lim’s view, was most likely due to higher inflation, increased interest costs and the impact to supply chains from Covid-19-related disruptions and the Russia-Ukraine war.
“In October 2023, we published a report on the decision by New York Public Service Commission (PSC) to reject an appeal to adjust prices in its power purchase agreements to incorporate inflation and other supply chain factors for four proposed offshore wind projects, including EW1 and 2. However, we believe Equinor/BP did not fully factor in the potential impact of a cancellation at that time,” Lim writes in her Jan 4 report.
While the cancelled contract is estimated to form about 1.5% of Seatrium’s $18.3 billion order book and is “not big”, Lim is expecting the cancellation to negatively impact the group’s share price.
However, Lim is recommending investors look to buy on any share price weakness as she is still projecting $7 billion worth of new order wins for FY2024 as Petrobras and TenneT are likely to award contracts to Seatrium.
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“[We] reiterate ‘add’ as Seatrium is the only offshore and marine proxy in Asean and it has a sizeable $18 billion order book with a path towards profitability as loss-making legacy projects are gradually completed by 1HFY2024,” says Lim. Her target price is still based on 1.5x calendar year (CY) 2024 B/BV, which is Seatrium’s seven-year average valuation.
The team at DBS Group Research is equally positive on Seatrium, as it keeps its “buy” call and target price of 18 cents despite the news.
The termination of Empire Wind 2 project will remove over $250 million – or less than 1.5% – from Seatrium’s orderbook, which is “relatively small”, says the DBS team.
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“It is not expected to have material financial impact as construction work was only expected to start in Jun-2024 and other existing projects will fill the production slot,” it adds.
Based on their current assessment, the team believes that Seatrium’s current ongoing projects have a low risk of cancelling on the group.
“The other major offshore wind contracts from TenneT ([around] $3.3 billion), which is a grid operator, is rather secure. We believe the longer-term prospects for offshore wind remains constructive,” says DBS. “We continue to like Seatrium for its turnaround story.”
Citi analyst Luis Hilado is also keeping his “sell” call with an unchanged target price of 10 cents, although he sees mitigating factors to the cancellation.
“Given that progressive payments have already been received and that the construction work was only set to commence in June, the cashflow impact is guided to be neutral and similarly applies to earnings per share (EPS) and net tangible assets (NTA) impact. The Empire Wind 1 contract of similar value remains live,” he writes, adding that the cancelled contract represents 1.4% of Seatrium’s $17.7 billion order book as at the 9MFY2023.
He also notes that two new contracts (from Sparta FPU and MODEC) have been won and may help plug the gap.
“Accordingly, we have maintained our current forecasts but note the cancellation weighs on sentiment of the order book segment. Renewables and green solutions, to which offshore wind projects are part of, were 40% of order book in 9MFY2023,” he says.
As at 3.20pm, shares in Seatrium are trading 0.2 cents lower or 1.74% down at 11.3 cents.
