Keppel Corp - DBS Research 2017-03-22: Signs agreement with Borr Drilling for Transocean units

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KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corp - Signs agreement with Borr Drilling for Transocean units

• Contract value largely intact with slight reduction of 1.4%. 
• Early delivery of first three units and further downpayment of 25% improves cash flow. 
• Deliveries of 12 other jackup rigs would eliminate a key overhang. 
• Maintain HOLD and TP S$6.00.

What’s New 

Keppel signs agreement with Borr Drilling for Transocean units. 

• Following last week’s news that Transocean is selling its shallow water fleet consisting of 15 high specification jackup rigs to Borr Drilling, Keppel announced that it has entered into a Heads of Agreement with Borr Drilling for the novation of five KFELS Super B Class jackup rigs currently being built by Keppel FELS for Transocean, to Borr Drilling.
• Borr Drilling will undertake the remaining installment payments to Keppel FELS.
• The transaction is subject to all three parties executing definitive agreements and satisfying formal closing conditions before the end of May 2017.

What’s the impact? 

Contract value marginally revised. 

• The price for each rig is reduced by US$3m or 1.4% to US$216m. Borr Drilling will also make a down payment of US$$275m, or US$55m for each rig. This represents 25% of the contract value, bringing total payment collected to 46%.

Delivery for three rigs brought forward. 

• The five rigs were ordered by Transocean in 2013 with original delivery timelines to be between 2016 and 2017, but were deferred by Transocean to 2020. The first three rigs will now be delivered between 2017 and 2018, while the remaining two rigs will be delivered in 2020.

Positive news; rig deliveries a catalyst. 

• While the Transocean rigs are marked as “safe” contracts in our model, the earlier delivery of first three rigs and further downpayment by Borr Drilling enables Keppel to improve cashflow and minimise risks of the projects. Excluding these, Keppel has 12 jack up rigs that are undelivered. Of these, seven contracts with Grupo R, Fecon and Clearwater are of higher risks in our view. 
• No provisions have been made for the jackups.
• Successful deliveries of these units would be re-rating catalysts.

Recommendation 

• Maintain HOLD. 
• Our TP of S$6.00 is based on sum-of-parts methodology: 
  1. O&M segment is valued at 2x P/BV, 
  2. infrastructure at 10x PE on FY17F earnings, 
  3. property segment at 0.85x P/BV, 
  4. Investment (Keppel Capital) at 15x net contribution, and 
  5. market values/estimated fair values are used for listed subsidiaries. 
• Our TP translates to 0.9x FY17 P/BV.

Pei Hwa HO DBS Vickers | http://www.dbsvickers.com/ 2017-03-22

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 6.000 Same 6.000