Keppel Corporation - UOB Kay Hian 2019-08-26: Kris Energy ~ A Larger-than-expected Millstone

KEPPEL CORPORATION LIMITED (SGX:BN4) | SGinvestors.io KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - Kris Energy ~ A Larger-than-expected Millstone

  • KRISENERGY LTD. (SGX:SK3) filed for bankruptcy protection post its recent 1H19 results.
  • KEPPEL CORPORATION (SGX:BN4) has a 40% stake in the company and has invested nearly S$400m in Kris Energy since its IPO in Jul 13. Kris Energy has not been profitable since its IPO and instead has been a larger-than-expected millstone for Keppel Corp within its investments segment.
  • We have assessed the impact on Keppel Corp in a worst-case scenario and believe that the impact will be minimal. Maintain BUY on Keppel Corp with a target price of S$7.61.



WHAT’S NEW


From large to small.

  • At Kris Energy’s IPO, Keppel Corporation’s then 31.4% stake was valued at $361.4m. Keppel Corp’s stake has since risen to 40% via a 2015 rights issue, however the carrying amount of this enlarged stake on its balance sheet as at end-1H19 was S$131m – a 64% decline over the past six years. This amount is equivalent to 1.7% of Keppel Corp’s current market capitalisation.

Oil price decline not at fault.

  • While Kris Energy’s fall can be partially be explained by a 34% decline in Brent oil price over the 2013-18 period, the company’s weak oil and gas production exacerbated matters - production peaked in 2016 at 5.97mmboe, and subsequently fell 35% to 3.9mmboe in 2018. Thus, Kris Energy went from net cash in 2013 to a net debt/equity of 1678% as at end-18. As seen in the chart in the PDF report attached, Kris Energy’s gross margin - as measured by its revenue per barrel of oil equivalent (boe) vs lifting costs – has contracted sharply since 2012.


STOCK IMPACT


Optically, things appeared relatively stable

  • as Kris Energy’s EBITDA before exploration spending (EBITDAX) grew at an unspectacular 3.3% CAGR over the 2013-18 period. However, the company’s Altman’s Z-score (a predictor of the chances of bankruptcy where < 1.8 equates to a likelihood of bankruptcy), fell from +2.7 in 2013 to -1.7 in 2018.

Kris has a large portfolio of valuable assets but appears to not have enough manpower or time to develop it.

  • The company currently has 14 contract areas in Bangladesh, Cambodia, Indonesia, Thailand and Vietnam, and it is an operator for nine of those areas. All of these assets have value given Kris Energy’s reported 2P oil and gas reserves of 63.5mmboe as at end-Dec 18, of which 34% of the reserves are of relatively higher-value oil. We highlight that these reserves are audited annually by Netherland, Sewell & Associates, Inc. (NSAI), a highly-regarded independent reserves auditor.

Impact to Keppel Corp.

  • In our view, should a worse-case scenario emerge, we believe that the impact to Keppel Corp will be minimal as the company’s carrying value for Kris Energy on its balance sheet represents 1.7% of its market cap. In 2018, Keppel Corp made an impairment of S$53m for Kris Energy and it is highly likely that another provision will need to be made in 2019, in our view.
  • On the shipyard side, Keppel Corp is currently constructing a S$30m production barge for the company for its offshore Cambodia Block A with delivery in 4Q19. Keppel Corp has not disclosed how much payment is remaining on this contract given its small size relative to its current orderbook of S$5.5b as at end-1H19.


EARNINGS REVISION/RISK

  • No changes. We have not made any changes to our earnings forecasts for Keppel Corp at this time.


VALUATION/RECOMMENDATION


Maintain our BUY recommendation.

  • We maintain our BUY rating with a target price of S$7.61 based on our SOTP Price valuation. Keppel Corp is currently trading at a one-year forward P/E of 12.6x based on our 2020F forecasts and below with its 5-year average of 14.5x.
  • Importantly, we highlight that the company’s 1-year forward P/B multiple of 0.9x is > 1SD below its 10-year historical average of 1.5x.


SHARE PRICE CATALYST

  • Further strength in new order wins for the O&M segment, particularly for renewable and LNG assets.
  • Inorganic and earnings-accretive acquisitions in the property space in China and tnam.





Singapore Research Team UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-08-26
SGX Stock Analyst Report BUY MAINTAIN BUY 7.610 SAME 7.610



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