Offshore & Marine - Maybank Kim Eng 2016-04-21: Sete Brasil to file for bankruptcy

Offshore & Marine - Maybank Kim Eng 2016-04-21: Sete Brasil to file for bankruptcy KEPPEL CORPORATION LIMITED BN4.SI  SEMBCORP MARINE LTD S51.SI 

Offshore & Marine Sector Flash: Sete Brasil to file for bankruptcy 

A closure or more uncertainties? 

  • According to Bloomberg news, Sete Brasil shareholders have decided to file for bankruptcy protection. 
  • The consideration first surfaced in early Jan 2016 (It’s going to get worse, 8 Jan 2016) and appears to have finally been decided and would be filed with the courts next week. 
  • Keppel (SELL, TP SGD4.42) and SMM (SELL, TP SGD1.00) have USD4.9b and USD5.6b of rigbuilding contracts with Sete respectively. 
  • We believe the next to watch are what kind of restructuring plans are being drawn out. This may involve banks taking over the assets and liabilities and selling them to new investors. 
  • But more importantly, we need clarity on which contracts will remain intact, whether and how Keppel and SMM would be paid. 
  • In our view, this overhang has not been completely removed and there are still uncertainties. 

Are the provisions sufficient? 

  • Keppel and SMM have taken provisions of SGD230m and SGD329m for the Sete contracts. 
  • While SMM’s provision was close to our estimate of SGD381m in our report (How Low is Low Tide? – 19 Jan 2016), Keppel’s provision was comparatively lower and we therefore suspect that more writedowns may be required. Both have given limited disclosures on the assumptions used in arriving at the provision figures. 
  • As Keppel has just reported its 1Q16 results, we may need to look to SMM’s results reporting on 27 Jan 16 to see if they could provide any insights on the need for addition writedowns. 

Orders might need to be removed from orderbook 

  • The unrecognised portion of Sete Brasil contracts account for c.40-45% of Keppel’s 1Q16 net orderbook of SGD8.6b and SMM’s net orderbook of SGD10.4b. 
  • So far, 3 units each for both rigbuilders are 50-90% complete while the other 3 for Keppel and 4 for SMM are less than 30% complete. We think some of these orders, especially the last 3-4 units, may be axed and could be removed from their orderbooks. 
  • Nevertheless, we had already removed all Sete Brasil revenue recognition in our forecasts. 

Maintain negative view 

  • We maintain our negative views on the rigbuilders. Other than the Sete Brasil issue, our concern is that more contract deferments and cancellations may surface. 
  • While oil prices have rebounded from January lows, this is still insufficient to induce confidence for investments in new rigs. 
  • Investors who expect new orders to follow along with the oil price rally may be disappointed. 
  • Instead, we see weak order replenishment over the next two years, expecting zero drilling rig orders for the rigbuilders. This would lead to the further cuts to consensus EPS estimates. 

Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-04-21
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 4.42 Same 4.42
SELL Maintain SELL 1.00 Same 1.00