Keppel Corporation - OCBC Investment 2017-12-26: S$570M Fines To Be Provided For In 4Q

Keppel Corporation - OCBC Investment 2017-12-26: S$570M Fines To Be Provided For In 4Q KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - S$570M Fines To Be Provided For In 4Q

  • Reaches resolution; S$570m fines.
  • 4.5% of NAV.
  • One-off item.

To provide for fines totalling S$570m 

  • Keppel Corp (KEP) announced that its O&M unit has reached a global resolution with the criminal authorities in the US, Brazil and Singapore, bringing closure to the investigations into corrupt payments by a former agent, Mr. Zwi Skornicki, in Brazil. Keppel O&M will pay fines totalling US$422m (S$570m) to the three jurisdictions, representing a 25% discount off the bottom of the applicable fine range under U.S. Sentencing Guidelines, the maximum cooperation and remediation credit allowed. 
  • The authorities recognise Keppel Corp’s cooperation in the investigations and its extensive remedial measures, and disciplinary actions taken. As such an independent compliance monitor was not necessary.

One-off impact - accounts for 4.5% of NAV 

  • The financial penalty is an extraordinary item and its impact is one-off. We estimate that the fine of S$570m accounts for about 4.5% of Keppel Corp’s 3Q17 net asset value, and Keppel Corp has the financial resources to pay the penalty. 
  • Management has also mentioned that it will not prevent the group from pursuing its growth plans. Keppel Corp will make a provision in the current financial year, meaning that we will see the impact in the 4Q17 results. 
  • If the fines had been paid at the end of Dec 2016, Keppel Corp’s net gearing would have increased from about 0.565x then to around 0.64x, an increase of about 750 basis points (7.5%). As this is an extraordinary event, Keppel Corp will ring-fence the financial penalty when considering the final dividend to propose for the current year.

Fair Value Estimate slips to S$8.12 

  • After adjusting our O&M book value lower and updating the values of the group’s other business segments, our fair value estimate slips from S$8.41 to S$8.12. This is not a large impact on our fair value as
    1. we only use 1.1x P/B to value the O&M segment, and
    2. most of the group’s value is still from the property segment. 
  • Given the upside potential of 11.1%, we maintain our longer-term BUY rating on the stock, though there is likely to be a negative knee jerk reaction on Keppel Corp's share price post this announcement.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-12-26
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 8.12 Down 8.410