Keppel Corporation - OCBC Investment 2016-01-22: Starts making provisions for Sete

Keppel Corporation - OCBC Investment 2016-01-22: Starts making provisions for Sete KEPPEL CORPORATION LIMITED BN4.SI 

Keppel Corporation: Starts making provisions for Sete 

 S$230m provisions for Sete 
 Offshore marine saw net loss in 4Q 
 Lower FV to S$4.38 

 Offshore marine saw net loss of $61m in 4Q15 

  • Keppel Corporation reported a 36.8% YoY fall in revenue to S$2.48b and a 44.2% drop in net profit to S$404.8m in 4Q15, bringing full year net profit to S$1.52b, in line with our full year forecast of S$1.49b. 
  • Net profit was impacted by $230m worth of provisions for the Sete Brasil projects, but boosted by S$129m of revaluation gains from investment properties in the property segment. 
  • Property performed well in the quarter, registering net profit of S$368m in 4Q15, but the O&M division saw a net loss of S$61m in the quarter. 

 S$230m provision for Sete rigs in 4Q15… more to come? 

  • For the S$230m provision for Sete rigs, management was reticent in explaining its base case scenario and assumptions at arriving this figure, merely saying that this was arrived at after assessing the “construction progress, payment status, and amounts due to vendors, amongst other areas”. 

 Potential for provisions not just from Sete Brasil 

  • We believe that the market has been focusing on potential writedowns from Sete Brasil, and while rightly so, less attention has been paid to potential provisions from Keppel’s newbuild jackup rig contracts. 
  • We estimate there are about 21 jack-up rigs in the group’s order book, of which about 12 are at risk of provisions. They have been mostly deferred by requests from customers, and should oil prices stay low, we believe that the risk of further delays or even cancellations will rise. 

 Lowering FV to S$4.38; worst case S$3.91 

  • With lower earnings visibility, we switch our valuation for the O&M sector from P/E to P/B. 
  • Considering that the O&M division has started to turn in a net loss, we use a 0.7x P/B, close to previous troughs and also due to the risk of further provisions from Brazil. 
  • Meanwhile, as large SGX-listed property developers are mostly trading at 0.6-0.7x book, we lower our valuation for the property segment from 0.9x book to 0.7x. This results in a fair value estimate of S$4.38, implying a 0.7x P/B for the group. 
  • Maintain HOLD. 
  • In the worst case scenario of a complete write-down in O&M’s book, our fair value estimate would fall to S$3.91.

Low Pei Han CFA OCBC Securities | 2016-01-22
OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 4.38 Down 6.96