CIMB Research 2015-07-22: Keppel Corp - Flexibility built in. Maintain ADD.

Flexibility built in 

  • We believe Keppel’s flexibility in working around designs and delivery is key to its latest FLNG conversion from Golar FLNG worth US$684m. 
  • The contract is 7% lower than the first two units secured in 2014, taking into consideration the lower cost of equipment, cost savings and efficiency expected on a repeated design. 
  • This brings YTD orders to S$1.44bn, in line with our S$2bn for 2015. 
  • Maintain Add with lower target price, still based on RNAV incorporating lower market value for stubs. 
  • Key potential catalysts include stronger-than-expected orders and margins. 

What Happened 

  • Keppel has signed a contract worth c.US$684m with Golar Gandria, a subsidiary of Golar LNG, to convert a Moss-type liquefied natural gas (LNG) carrier, the Gandria, into a Golar floating liquefaction (GoFLNG) facility. 
  • The contract will become effective upon the parties fulfilling certain conditions precedent by 21 Sep. 
  • This is the second of two options that are part of a contract awarded by Golar in 2014. 
  • Currently, Keppel is converting two FLNG facilities: Hilli (more than 40% completed and for delivery in 1Q17) and Gimi (for delivery in mid-2018). 
  • The construction of Gandria will take 31 months and will only begin after Keppel receives a notice to proceed by Dec 16. 

What We Think 

  • The payment terms for the contract are on a milestone basis, with c. US$50m initial payment. 
  • Disregarding a stronger US$, the current contract value of US$684m (S$937m) is lower than the first two conversions worth US$705m (S$918m) each. 
  • Keppel reiterated that there have been no discounts given but overall savings in cost resulted in a lower contract value. 
  • We believe Keppel’s flexibility in allowing Golar LNG time to source for funding and charter contracts is key. 
  • Golar LNG has up to Dec 16 to issue a start-work order for the conversion of Gandria. This is similar for the second FLNG, Gimi, as the contract was made effective in Dec 14 but work has not begun as Golar LNG has up to Nov 15 to issue the notice. 
  • The contract is also cancellable before start-work order issuance with cancellation fees. 
  • Golar can also determine when Black & Veatch place orders for certain long-lead items, which helps to substantially reduce the initial payment due prior to contract effectiveness. 
  • Keppel is releasing its 2Q15 earnings on 23 July. 
  • We projected net profit of S$370m (+3% qoq, -8% yoy), with no major surprises. 
  • The EBIT margin likely hovered at 12% with the delivery of at least three B-class jack-up rigs. 

What You Should Do 

  • Stay invested. Keppel is trading at -0.5 s.d, below its historical mean of 10.6x.
  • Target price: S$9.31 (prev S$9.97).

(LIM Siew Khee)