Keppel Corporation - UOB Kay Hian 2016-03-14: Earnings Update ~ Impact Of Transocean’s And Golar’s Deferrals

Keppel Corporation - UOB Kay Hian 2016-03-14: Earnings Update ~ Impact Of Transocean’s And Golar’s Deferrals KEPPEL CORPORATION LIMITED BN4.SI 

Keppel Corporation: Earnings Update ~ Impact Of Transocean’s And Golar’s Deferrals 

  • Keppel’s two FLNG projects from Golar have had their Notice to Proceed timelines deferred to end-16. 
  • Given the sizeable combined contract size of US$1.4b, we are removing it from our earnings estimate till the projects have formally started, and hence our 2016-18 earnings forecasts are reduced by 2-4%. 
  • We also factor in Transocean’s deferral earnings impact, which is minimal at about 1%. Current valuation implies a 25% discount for the O&M unit. 
  • Maintain BUY with a revised target price of S$6.50. 


WHAT’S NEW 


 Golar defers notice to proceed for its two FLNG projects. 

  • In Golar’s [GLNG US] 4Q15 earnings call, management remarked that they had during the quarter “negotiated a deferral of the Notices to Proceed for the Gimi and Gandria projects on identical terms, but at a later start date of end-16”. 
  • The deferral notice was neither announced by Keppel nor Golar. The Gimi and Gandria projects relate to the floating liquefied natural gas (FLNG) projects which Keppel had secured in Dec 14 and Jul 15 respectively, for which Gimi was to receive a notice to proceed no later than Nov 15, while Gandria was to receive its notice “in 2016”. 

 Transocean defers delivery of its five JUs to 2020. 

  • Last week, Transocean announced a delivery deferral of its five jack-ups (JU) being built at Keppel. This is not the first deferral: Originally scheduled for first delivery starting 1Q16, this was deferred to 1Q18 with a six-month interval between each rig. 
  • The latest deferral now shifts first delivery to 1Q20 with a 2-3 month interval between each rig. 


STOCK IMPACT 


 Keppel has US$2.1b of orders from Golar. 

  • To recap, Keppel secured US$2.1b of FLNG orders from Golar between 2014 and 2015 (see table overleaf). Hilli has already commenced conversion, and remains on track according to Golar’s management in the earnings call. In light of the deferral, we now expect Gimi to be delivered in 2019 instead of 2018, while Gandria will remain slated for delivery in 2019. 

 Earnings impact greatest from the Golar deferral. 

  • We had earlier factored in earnings contribution from Golar to begin in 2016. As such, deferring the project start to 2017 significantly impacts our 2016 earnings forecast. 
  • Transocean’s deferral has a lesser impact as we had already factored in the delay. The recent deferral is an extension of the initial deferral and as such the impact is muted. 
  • In numbers, the annual earnings impact from Gimi and Gandria combined is estimated at S$87m (6.7% of prior 2016 estimate), while the extension of Transocean’s deferral lowers the overall project’s earnings contribution from S$42m to S$31m (net change is 1% of prior 2016 estimate). 

 Minimal working capital locked up from deferral. 

  • Transocean’s rigs had struck steel dates between Feb 14-Nov 15 (see table overleaf), and we estimate construction progress to be between 5-45%. 
  • For Gimi and Gandria, project has yet to begin, so expenditure on inventories should have been minimal. As such, we do not think significant working capital would be locked up in these projects. 


EARNINGS REVISION/RISK 


 Reducing 2016-18 forecasts by 2-4%. 

  • To be conservative, we are removing the Gimi and Gandria contracts from our estimates until official NTPs are received. Due to a revision in our earnings recognition methodology for the Transocean rigs, our 2016 estimate reflects a lower-than-expected impact. 
  • Our revised estimates for 2016-18 are S$1.3b (-2.1%), S$1.1b (-3.7%) and S$1.3b (-3.4%). Had our prior estimates incorporated the revised methodology, our 2016-2018 earnings would have fallen by 4%, 5% and 4% respectively. 


VALUATION/RECOMMENDATION 


 Maintain BUY, reduce target price to S$6.50. 

  • The impact from our reduced earnings lowers our SOTP target price from S$6.60 to S$6.50. This is based on 1.15x 2017 P/B for the O&M division. 
  • Maintain BUY on Keppel Corp. 
  • We like their diversified business, which continues to provide a strong earnings buffer amid the downturn plaguing its offshore business unit. We estimate Keppel’s SOTP sans the O&M unit to be S$5.20, with the current share price implying a 25% discount for the O&M unit. 
  • Keppel’s O&M orderbook is likely to remain intact given its tier-1 clientele profile, and we do not see cancellation risks for now that would result in asset impairments that might befoul peer SMM. 


SHARE PRICE CATALYST 

  • Oil price recovery. 





Nancy Wei UOB Kay Hian | Foo Zhiwei UOB Kay Hian | http://research.uobkayhian.com/ 2016-03-14
UOB Kay Hian Analyst Report BUY Maintain BUY 6.50 Down 6.60


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