KEPPEL CORPORATION LIMITED
BN4.SI
SEMBCORP INDUSTRIES LTD
U96.SI
SEMBCORP MARINE LTD
S51.SI
Offshore & Marine - It’s going to get worse
Sete Brasil may file for bankruptcy
- A Bloomberg article said Sete Brasil is mulling a bankruptcy filing although restructuring is still in the cards. If this materialises, it would jeopardise Keppel’s USD4.9b and SMM’s USD5.6b rigbuilding contracts with the company.
- We read this as a significant de-rating catalyst and reiterate our NEGATIVE view on the sector.
- Stocks impacted are (KEP SP, HOLD, TP SGD7.70), (SCI SP, HOLD, TP SGD3.53) and (SMM SP, SELL, TP SGD1.53).
- Our estimates and ratings are now under review.
Cancellation of all rig contracts now a possibility
- Keppel and SMM have not been paid by Sete Brasil since Nov 2014, which has been well-flagged.
- We estimate that each has recognised about SGD1.5-2.0b of revenue and the unrecognised portions make up about 40-50% of their SGD10-11b orderbook. Up till now, the widely-held view was that Sete Brasil would scale down its 29-rig program to 15, of which 13 will be from Keppel and SMM, with deliveries over 2015-2020.
- Talks have been ongoing for Sete Brasil to restructure and secure financing. The prospects of Keppel and SMM receiving payments now look increasingly bleak.
- In our view, the worst-case scenario of almost all rig contracts being eventually terminated may now be a possibility. This applies to non-Sete rigs.
More shoes could drop
- If we remove all revenue recognition from Sete Brasil, our FY16-17 EPS for Keppel/SMM could be cut by up to 17/50% based on preliminary estimates. But more importantly the resulting reduction in cashflows could raise SMM’s net gearing from 0.6x in 3Q15 to 0.9x in FY16 but Keppel’s could still stay at the 0.5x level given lesser exposure and diversified income stream.
- Yet this is just the tip of the iceberg. If they need to make impairments to inventories, equity value will compress, leading to much higher gearings. These could trigger banking covenants forcing the companies to raise equity.
- Dividends will be cut.
Sector read-throughs and implications
- The read-throughs for the sector and our view of what more could happen before things turn for the better are:
- We expect a wave of impairments by yard and asset owners leading to covenant breaches and eventually M&As or bankruptcies for some.
- More intense price competition as desperate companies attempt to get assets utilised to avoid having them impaired.
- Oil companies may force oil services players to enter into multi-year locked-in contracts at low prices, crimping their ability to benefit when the industry turns.
- There are no ‘safe’ customers or contracts in this downturn. All are doing whatever they can to cut cost and save themselves.
- Stock valuations will set new troughs lower than GFC if the risks materialise.
Yeak Chee Keong CFA
Maybank Kim Eng
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http://www.maybank-ke.com.sg/
2016-01-08
Maybank Kim Eng
SGX Stock
Analyst Report
7.70
Same
7.70
1.53
Same
1.53
3.53
Same
3.53
