Keppel Corporation - CGS-CIMB Research 2019-02-27: Building Up O&M Fund Portfolio


Keppel Corporation - Building Up O&M Fund Portfolio

  • Keppel Capital is subscribing for 30% of Gimi FLNG from Golar and capping its investment at US$250m. The FLNG has a 20-year charter with BP.
  • We think Keppel O&M is likely to receive some top-up in construction contract from this deal in addition to the c.US$755m conversion contract.
  • This, and the recent Grupo R rig sale-and-leaseback arrangement, could be the first few assets to be injected into an offshore infrastructure fund to come.

At Keppel Capital level, 30% stake at US$250m for total project worth US$1.3bn; to inject into fund in longer term

  • Keppel Capital, via indirect wholly-owned subsidiary First FLNG Holdings, is subscribing for 30% of the total issued ordinary share capital of Gimi MS, with a cap of US$250m. The total project to construct, deploy and commission for Gimi is now estimated to be US$1.3bn, excluding financing costs.
  • Gimi FLNG has a 20-year charter with BP to service the Greater Tortue Ahmeyim project offshore Mauritania and Senegal.
  • Production is expected to start in 2022. Gimi is designed to produce c.2.5m tonnes of LNG p.a. Golar estimates the EBITDA of Gimi to be c.US$215m.
  • We think that the asset will be injected into an offshore infrastructure fund in the longer term, together with other assets that Keppel O&M has stakes in, including the Grupo R jack-up rig, Cantarell IV, for which it entered a sale-and-leaseback recently (see report Keppel Corporation - CGSCIMB Research 2019-02-20: Rig Delivery A Sign Of Market Recovery).
  • In 2014, KEPPEL CORPORATION LIMITED (SGX:BN4) acquired 10% interest (US$50m) in Golar Hilli, the first FLNG project that Keppel O&M built. The group subsequently reduced its stake in Aug 2017, selling 5% to Golar Partners for c.US$20m. Hilli (operating only two of four LNG trains) achieved its first gas in early-2018 with an estimated c. US$20m of recurring income recorded in Keppel O&M in FY18.

At Keppel O&M level, more construction contracts

  • Recall that Keppel O&M was awarded a conversion contract for Gimi FLNG in 2014 from Golar LNG of US$705m with the condition that full construction will only begin when Keppel Shipyard receives a notice to proceed no later than Nov 15. However, given the challenging market, Keppel only received a limited notice to start work in Dec 18 worth US$50m.
  • With this latest development, we expect Keppel O&M to receive more top-up for the conversion work in the range of US$200m-300m (S$270m-400m), assuming total shipyard costs for the US$1.3bn project are about US$1.05bn. We have assumed S$2.5bn of new orders in 2019 for Keppel O&M.

Maintain ADD and Target Price of S$8.41

  • We retain our SOP-based target price. We believe that, to cope with the challenging newbuild market, Keppel Corp is taking the right step to own and operate with limited risks and the potential to inject the assets into an infrastructure fund to build its portfolio of recurring income.
  • Catalysts could come from stronger order wins and settlement of Sete Brasil rigs.
  • A downside risk is a sudden plunge in oil prices.

LIM Siew Khee CGS-CIMB Research | 2019-02-27
SGX Stock Analyst Report ADD MAINTAIN ADD 8.410 SAME 8.410