Keppel Corp (KEP SP) - UOB Kay Hian 2017-03-20: Borr Drilling Eyes Transocean’s Five Newbuilds at Keppel

Keppel Corp (KEP SP) - UOB Kay Hian 2017-03-20: Borr Drilling Eyes Transocean’s Five Newbuilds at Keppel KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corp (KEP SP) - Borr Drilling Eyes Transocean’s Five Newbuilds at Keppel

  • Upstream reported that Borr Drilling is looking to acquire Transocean’s jack-up fleet (including its five newbuilds at Keppel) for US$1.2b. A transaction seems imminent as Borr is already raising capital of the same amount. 
  • Estimating US$708m for the newbuilds (original price tag: US$1.1b), we estimate the impact to Keppel is a loss of 8-14 S cents/share. Actual impact is subject to the final terms of the deal. 
  • Maintain HOLD. Our target price remains at S$6.45. Entry price: S$6.10.



WHAT’S NEW


Borr eyes Transocean’s jack-up fleet and newbuilds. 

  • Upstream reported on 10 Mar 17 (link) that Borr Drilling (Borr) is understood to be close to finalising a deal to acquire the jack-up fleet of Transocean. This includes Transocean’s entire rig fleet of 10 highspecification jack-ups, plus its five newbuild jack-ups under construction at KeppelFELS.

Transaction price of US$1.2b. 

  • Industry sources quoted by Upstream point to the transaction being valued at US$1.2b. We further note that Borr Drilling had on 15 Mar 17 requested a special general meeting to increase its share capital from 122.5m to 322.5m shares. 
  • According to Carnegie Investment Bank, this points to capital raising of ~US$1.2b based on Borr Drilling’s last traded price of NOK32/share (Norwegian OTC Ticker: BORR). A transaction seems imminent.

Background of Borr Drilling. 

  • The Oslo-based company is bankrolled by Tor Olav Troim, the former right-hand man of shipping and offshore billionaire John Fredriksen.
  • Borr recently purchased a pair of KFELS jack-ups from bankrupt Hercules Offshore for US$130m.


STOCK IMPACT


Estimated valuation of US$708m for newbuild rigs. 

  • Referencing possible prices using Bassoe Offshore’s rig valuation tool and taking discounts where appropriate, we estimated a valuation of US$492m for Transocean’s existing rig fleet. 
  • The difference between our estimate and the US$1.2b implies a valuation of US$708m for the newbuilds, translating into US$142m per rig.

Impact to Keppel is highly subject to outcome of negotiations. 

  • Ascertaining the impact to Keppel is not a straightforward issue and is subject to the final terms between both parties. Based on our discussion with industry professionals, we identified four permutations that this could be transacted: 
    1. Transocean forfeits all of its deposit with Keppel to sweeten the deal, and Borr settles the balance with Keppel at no discount, 
    2. same as a) but with Keppel taking a discount, 
    3. Borr pays Transocean’s costs incurred thus far, and settles the balance with Keppel at a discount (20-40% discount based on current market conditions) or, 
    4. Transocean forfeits part of its deposit, and settles with Keppel at a discount.

Most likely scenario sees a loss of 8-14 S cents. 

  • In the negotiations, Transocean and Keppel will try to minimise their losses while Borr will strive to seek the lowest price.
  • Therefore, Scenarios #1 and #2 are effectively ruled out. Between the remaining scenarios, #3b and #4 are the most likely as they are closer to our estimated valuation of US$708m for the five newbuilds and meet the above criteria. Therefore, the impact to Keppel should lie somewhere between a loss of 8-14 S cents or 17-30% of our FY17 profit estimate.

No profit reversals should be required. 

  • As the rigs are not being cancelled, a profit reversal should not be required. However, Keppel will likely have to make a provision for the expected construction losses on the rig orders.

Rig orders were probably not provided for. 

  • Keppel was unable to comment on the news. Given Transocean’s Tier-1 client status, we think Keppel may not have provided for the orders, and do not think the market was expecting any issues with it either.


EARNINGS REVISION/RISK

  • No change to earnings assumption. Until the deal materialises, we keep our earnings estimates unchanged as we await confirmation and details.


VALUATION/RECOMMENDATION

  • Maintain HOLD, with target price of S$6.45. 
  • Our SOTP target price of S$6.45 remains largely unchanged even after adjusting for recent changes in share price of Keppel’s investment portfolio. 
  • Our SOTP valuation is based on the RNAV for Keppel Land (42% discount) and pegs the O&M business at 1.2x 2017F P/B, based on a regression of ROE against P/B. 
  • While Keppel’s earnings might have bottomed, supported by earnings from the property division, O&M’s weak earnings continue to weigh. Rig sales like this in the near to medium term pose earnings downside risk. This gives us pause in claiming that the worst is over; we are not out of the woods yet and likely in it for a long time. 
  • Entry price is S$6.10.




Foo Zhi Wei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-20
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 6.450 Same 6.450





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