KEPPEL CORPORATION LIMITED
BN4.SI
Keppel Corp (KEP SP) - Unsustainable Rally
No fundamental support, SELL into strength
- We urge investors to sell into Keppel’s recent surge from its SGD4.71 low, which we think was driven purely by oil price sentiments. This is unsustainable as rig building fundamentals have not improved and EPS is likely to be subjected to further consensus downgrades in FY16.
- We cut FY16-17E EPS by 6-7% while raising FY18E by 2% as we factor in deferments for
- 5 x Transocean jackups,
- 1 x Ensco jackup and
- 2 x Golar FLNGs.
- We estimate that O&M segment revenue over FY16-18E will drop to c.SGD4.0-4.5b, vs the SGD6.2-8.6b over the last 3 years.
- Reiterate SELL, SOTP TP raised marginally from SGD4.24 to SGD4.42.
No improvement in the drilling rig market
- We stress that there have been no improvements in the drilling rig market. Instead, more rig delivery deferments are showing up.
- We highlighted deferments by customers of Keppel and Sembcorp Marine (Transocean, Ensco and Helix) in our last sector flash note.
- Upstream said in a 24 Mar 2016 article that Perisai Petroleum wants to defer its second jackup with Sembcorp Marine (SMM SP, SELL, TP SGD1.00), again. The rig was originally scheduled for 2Q15 delivery but had been deferred once to 1Q16. There was no indication of the new delivery date.
Cracks in the FLNG market
- The industry is hopeful of opportunities in the LNG market. But we see cracks emerging even in FLNG:
- Golar LNG said in its FY15 results that it will delay giving Keppel the “notice to proceed” for two FLNG vessels. Golar was supposed to give the notices by Nov 2015 and in 2016 respectively. The notices would now be given by end-2016. The two FLNGs are considered as secured contracts in Keppel’s orderbook and are worth USD705m and USD684m respectively. We have pushed our revenue recognition assumptions for these contracts back by 12 months.
- Australia’s Woodside said last week that it has decided not to move ahead with the Browse FLNG project after completing its front-end engineering assessment, citing unsupportive economic environment. The project would have required three FLNG vessels.
- Indonesia President said that it prefers an onshore-based LNG solution for its Abadi gas field. Inpex originally proposed a FLNG solution which was initially given the green light by SKK Migas, Indonesia’s upstream regulator.
- We think that the abandonment of Browse project and the switch away from FLNG for the Abadi field may make it harder for Golar to find contracts for the two FLNG vessels it intends to construct with Keppel.
- Although its FLNG are not to be built specifically for these projects, the removal of global demand for these FLNG units would mean that competition will intensify for remaining projects. This may put USD1.4b worth of contracts at risk for Keppel, which is c.21% of its FY15 net orderbook of SGD9.0b or c.42% of its net orderbook if we exclude Sete Brasil orders.
Stock momentum will lose steam w/o EPS support
- Keppel’s recent price surge was likely driven by oil price sentiments rather than fundamentals.
- Historically, Keppel’s stock price has been strongly correlated to oil price. This was so because rig orders had tracked oil price movements then. The orders that followed through with oil price rallies offered EPS growth visibility for rig builders. This time round, the widely-held view is that oil price will recover only to the USD40-50/bbl levels.
- Adding the rig supply glut, we doubt that sufficient confidence can be generated for rig owners to start placing fresh rig orders. Instead, we believe that there could be more rig deferrals or even cancellations, leading to further consensus EPS downgrades in FY16.
- Any re-rating not supported by any visibility for EPS growth is unlikely to be sustainable in our view.
Still a SELL, TP raised slightly to SGD4.42
- We cut FY16-17E EPS by 6-7% but raise FY18E by 2% as we factor in the contract deferments of 5 x Transocean, 1 x Ensco and 2 x Golar FLNG units.
- We estimate that Keppel’s O&M revenue over FY16-18E will be only c.SGD4.0-4.5b, vs SGD6.2- 8.6b over the last 3 years.
- We use an asset-based approach to value Keppel O&M segment by taking its book value and adjusting it for our estimate of potential asset writedowns.
- We note that two jackup units for Grupo R have just been delivered and thus write back SGD104m for those units. But O&M segment adj. book value is still lower than our previous assessed value because cash has flowed out from the O&M segment to the Keppel Group level and other segments between 3Q15 and FY15. This led the decrease in O&M book but an increase in the value for other segments, most notably its Investment segment.
- The net effect is that our SOTP TP is raised from SGD4.24 to SGD4.42, still a SELL.
- We believe that O&M woes may persist for 1-2 years and any re-rating catalysts for Keppel will have to come from non-O&M segments such as Property or Infrastructure.
- We agree that there is long-term value in those segments, given that implied Property segment valuation is c.25% below book. But we believe that more negative news in the O&M segment will eclipse any positive developments in the other segments for now. Therefore even long-term investors would have an opportunity to accumulate at a lower price.
Swing Factors
Upside
- Sete Brasil resolves its financing woes, is able to honour all contracts and pays Keppel its dues.
- Ability to re-sell rigs if they are cancelled and make better profits because of forfeiture of original clients’ deposits.
- Asset divestments that result in major gains and valueunlocking. Possible restructuring of Keppel T&T and Infrastructure.
Downside
- Sete Brasil files for bankruptcy, dishonouring all its semisub contracts with Keppel O&M.
- Contract cancellations by other drilling-rig owners, resulting in asset writedowns and losses.
- Property segment fails to compensate for lower O&M profits.
Yeak Chee Keong CFA
Maybank Kim Eng
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http://www.maybank-ke.com.sg/
2016-03-30
Maybank Kim Eng
SGX Stock
Analyst Report
4.42
Up
4.24
