Keppel Corporation - CGS-CIMB Research 2018-11-16: Not Too Alarmed By Termination


Keppel Corporation - Not Too Alarmed By Termination

  • We are not too concerned about the termination of integration and commissioning contract worth S$165m as it is not a precursor to a downturn. 
  • Although no details were provided, we believe there is no EPS impact as Keppel has received milestone payments for the c.30% of the costs it incurred. 
  • Maintain ADD with unchanged SOP Target Price of S$8.28.
  • Key catalysts are clarity on the transformation plan for M1 (SGX:B2F)’s acquisition and stronger orders. 

Putting things together

  • Keppel announced that Keppel FELS has entered into a settlement agreement with an unnamed global oil and gas services company to terminate with effect from today a contract for integration and commissioning works for a newbuild asset worth c. S$165m.
  • The termination of the contract was mutually agreed upon after taking into consideration the customer’s requirements and market conditions. The project was 30% complete and Keppel FELS has been fully compensated.
  • We suspect the termination could be a semi-tender rig, SKD Kinabalu belonging to Sapura Energy. In Keppel’s FY14 earnings announcement, management mentioned that it won two semis contract without providing the customer’s name and elaborating much as the yard was bound by a confidentiality agreement. We estimate the contract to be c.S$400m. In 2017, industry sources had reported that the deliveries of the two said semi-tenders were deferred for delivery from 2017 to 2019, and then to 2020. Keppel FELS was compensated for the delay.
  • SAPE saw weak average tender rig utilisation of 38% in 2QFY19 in addition to its recapitalisation exercise (rights issuance) to lower gearing level. We also deduced that the terminated semi-tender rig could be SKD Kinabalu which is an older unit (Frigstad T70) originally ordered from Kencana yard in 2011 but was delayed. The unit was subsequently moved to Keppel FELS to be integrated/completed, together with a newbuild order, SKD Raiqa. We understand that SKD Raiqa’s construction is ongoing and c.50% completed.

Implication minimal

  • The termination will not result in any loss and we maintain our EPS forecasts. Keppel’s O&M order book stood at S$8.8bn as at 88 Sep 88. We do not think the termination is a cue for further downturn in the offshore & marine market, but a customer-specific and niche asset issue.
  • We still like Keppel and maintain our SOP Target Price of S$8.88.
  • Key risks include sudden plunge in oil prices and weakness in global economy.

LIM Siew Khee CGS-CIMB Research | 2018-11-16
SGX Stock Analyst Report ADD MAINTAIN ADD 8.280 SAME 8.280