Offshore & Marine - CIMB Research 2017-12-25: Brazilian Grinch

Offshore & Marine - CIMB Research 2017-12-25: Brazilian Grinch KEPPEL OFFSHORE & MARINE CORRUPTION CASE SETE BRASIL PETROBRAS KEPPEL CORPORATION LIMITED BN4.SI SEMBCORP MARINE LTD S51.SI

Offshore & Marine - Brazilian Grinch

  • Keppel Corp will pay US$422m (S$570m) to settle bribery allegations in the US, Brazil and Singapore and treat it as an exceptional item before FY17 dividend consideration.
  • The bribery allegations involved 13 contracts that were awarded in Brazil since 2001, including the six semi-submersibles to Sete Brasil worth c.S$6.2bn in 2012.
  • Keppel Corp’s share price could weaken in the near term, as it has been dismissing the bribery allegations. Final dividend will be based on profit before penalty.
  • Sembcorp Marine was also named by a Petrobras executive along with Keppel Corp in the Petrobras bribery scheme. However, Sembcorp Marine has yet to make an announcement.
  • Maintain Over-Weight on the sector but expect some near-term selling pressure for the two stocks. The return of non-drilling orders could still be the key catalyst.



US$422m fines to US, Brazil and Singapore

  • Keppel Offshore & Marine (KOM) has reached a comprehensive global resolution with authorities in the US, Brazil and Singapore, bringing closure to the investigations into corrupt payments made by a former agent of Keppel Offshore & Marine in Brazil.
  • Keppel Offshore & Marine will pay fines totalling US$422m (S$570m) to the three jurisdictions:
    1. Criminal Division’s Fraud Section and the U.S. Attorney’s Office for the U.S. District Court for the Eastern District of New York,
    2. Ministério Público Federal (MPF) in Brazil, and
    3. the Attorney General’s Chambers (AGC) in Singapore. 
  • Half of the total penalty (US$211m) will be paid to Brazil while Singapore will receive U$105m.
  • The total penalty is 25% lower than the applicable fine range under the US Sentencing Guidelines. This is due to Keppel Offshore & Marine’s substantial cooperation in the investigation in addition to the extensive remedial measures taken by Keppel Offshore & Marine, such as the termination of employees involved and enhanced compliance controls.


Final dividend ring-fenced but hope for special dividend diminishes

  • Keppel Corp will make provisions for the amount in 4Q17 and treat this as a one-off event. The final dividend proposal will be based on profit before the penalty. 
  • We think there is very little hope for a high special dividend to celebrate its 50th anniversary. We forecast total DPS of S$0.22 (interim DPS: S$0.08 paid).
  • With the penalty, we estimate Keppel Corp’s net gearing to rise to c.0.6x by end-FY17F from 0.5x in 9M17.


13 Keppel Corp contracts were involved

  • According to the US Department of Justice, Keppel Offshore & Marine (KOM) paid c.US$55m in bribes to officials in Petrobras and the then-government political party in Brazil, in order to win 13 contracts from Petrobras and another Brazilian entity (Sete Brasil). The bribery scheme ran from 2001 to 2014.
  • The resolution of the case does not impact contractual obligations and commercial terms of the current contracts, including the negotiations to revive the stop-work Sete Brasil semi-subs. The final outcome of the revival depends on Sete Brasil’s restructuring plans.


Sembcorp Marine (SMM) also named but no development so far

  • In the ongoing corruption probe – Operation Car Wash – Sembcorp Marine (SMM) is also said to be involved in the bribery scheme. 
  • Sembcorp Marine has refuted the allegations but has made no further announcements. However, we expect Sembcorp Marine’s share price to be affected from the negative spillover from Keppel Corp news. 
  • We keep our Add recommendation on Sembcorp Marine with our target price of S$2.49, based on 2x FY18F P/BV, 20% discount to its 20-year average of 2.5x.


Highlighted Companies 


Keppel Corporation - Rating: ADD, Target Price S$8.58

  • Keppel Corp is our top pick in the O&M /conglomerate sector. 
  • Catalysts include divestment/delivery of deferred rigs (including Sete Brasil’s semisubs) and redevelopment of Keppel Towers.
  • Our SOP-based TP is unchanged.



Sembcorp Marine - Rating: ADD, Target Price S$2.49

  • We estimate Sembcorp Marine is gunning for US$5bn worth of sizeable non-rig projects which could stream in by 2018. 
  • Stronger-than-expected orders could catalyse the stock.









LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-12-25
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 8.580 Same 8.580
ADD Maintain ADD 2.490 Same 2.490



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