Keppel Corporation - CIMB Research 2017-03-21: Scooped by Borr Drilling

KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Scooped by Borr Drilling

Keppel is novating five Super B jack-up rigs from Transocean to Borr Drilling at US$216m per rig, almost at a zero discount to its original price of US$219m per rig.
Three of the rigs will be delivered in 2017 and the remaining two in 2020. A new deposit of US$275m will be paid, bringing total deposits to 45%.
The good terms secured are commendable, especially in the current oversupply situation in the rig market.

Upgrade to Hold with a higher target price of S$7.24 based on SOP valuation, comprising 0.8x P/BV for property, 1.5x O&M P/BV and 18x Keppel Capital.
Upside risk could come from stronger-than-expected orders and unlocking of noncore assets at attractive valuations. Downside risk is provisions for impairment.

Keppel FELS has entered into a Heads of Agreement with Borr Drilling to novate the five Super B high specification jack-up rigs currently being built by Keppel FELS for Transocean to Borr Drilling at US$1.1bn. This is part of the exercise of Borr Drilling (a Norwegian company founded by an ex-Seadrill team) to acquire Transocean’s entire fleet of jack-up rigs for US$1.35bn comprising 10 existing rigs and five under construction at Keppel FELS.

The original delivery dates of the five rigs were 2016-2017 but had been deferred by Transocean to 2020.
Under the new terms, the first three rigs will be delivered in 2017- 2018, while the remaining two rigs will be delivered in 2020. Each rig is now priced at US$216m vs. the original price of US$219m inked in 2013.
US$275m deposits will be paid in the new terms, freeing up working capital. The first three rigs are c.75% completed while the remaining two are less than 20%.

The US$1.35bn package paid by Borr Drilling suggests that it is paying US$250m for Transocean’s fleet of existing jack-up rigs including those that are cold stacked.
Six out of the 10 Transocean rigs are more than 15 years of age and five are c.4.5 years. We assume the 15-year old rigs and older are priced at US$5m, leaving the 4.5 year old at US$55m per rig, or a 70% discount to cost. Yet, Keppel was able to get almost zero discount for its fleet, which could be due to the quality and high-specs of Super B class.

Order book stood at S$3.7bn as at end-16. We up our 2017 order win to S$2bn from S$1.2bn (FY16: S$0.5m), as enquiries improved on gas-related (FLNG) and non-drilling equipment (dredgers, etc.).
Our FY17-19 EPS is lifted by 1-5% to account for higher revenue from new orders and revised revenue recognition for Borr’s jack-up rigs.

We think the Borr contract is a good reference point for “realisable value” of undelivered rigs, reducing risk for rigs/inventory impairment. However, there could still be some impairment in 2017 for mothballing of Singapore yards.
We upgrade Keppel to Hold from Reduce with a revised sum-of-parts valuation.
Oversupply of rigs will still be an overhang and we are unlikely to see a surge in order momentum while ROE for Keppel Land has declined to c.6% and it is in need of more recycling of capital.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-03-21

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