Sembcorp Marine - OCBC Investment 2017-12-26: On Focus Next Post Keppel Corp's Penalty

Sembcorp Marine - OCBC Investment 2017-12-26: On Focus Next Post Keppel Corp's Penalty SEMBCORP MARINE LTD S51.SI KEPPEL OFFSHORE & MARINE JURONG ARACRUZ

Sembcorp Marine - On Focus Next Post Keppel Corp's Penalty

  • Keppel Corp (KEP) gets S$570m fines.
  • Market to focus on Sembcorp Marine (SMM) next.
  • Bigger % impact on balance sheet? 

Keppel Corp to provide for S$570m fines – how about Sembcorp Marine? 

  • Keppel Corp announced last Saturday 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. 
  • Recall that agents of Keppel O&M and Jurong Aracruz (Sembcorp Marine’s yard in Brazil) had been accused of making corrupt payments, and with this latest development, the market is likely to also focus on whether Sembcorp Marine will face a similar penalty.

Quick calculation – S$570m ~22.6% of NAV 

  • For Keppel, 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.

    (See report: Keppel Corporation: S$570M Fines To Be Provided For In 4Q17)
  • We are in no position to comment on whether Sembcorp Marine will be impacted, but based on a back-of-the-envelope calculation, S$570m would represent about 22.6% of Sembcorp Marine’s 3Q17 net asset value. 
  • Similar to Keppel Corp, should there be any fine, we do not expect any operational impact in the sense that Keppel Corp will continue its operations in the US and Brazil, and Keppel Corp’s management also does not expect any negative impact on its ability to bid for contracts in the US, Brazil and other countries. 
  • Keppel Corp also does not expect to face prosecution in any other jurisdiction for the offences.

Lower Fair Value Estimate to S$1.74; downgrade to SELL 

  • We look out for any newsflow from Sembcorp Marine regarding the above, but meanwhile we conservatively lower our estimate for the group’s book value to take into account the latest development, and our fair value estimate correspondingly drops from S$2.26 to S$1.74. 
  • As such we downgrade our rating on Sembcorp Marine to SELL on valuation grounds. 
  • A negative knee jerk reaction on Sembcorp Marine’s share price is also expected post Keppel’s announcement.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-12-26
OCBC Investment SGX Stock Analyst Report SELL Downgrade BUY 1.74 Down 2.260