Keppel Corporation - OCBC Investment 2019-10-08: Moving On From An Impasse


Keppel Corporation - Moving On From An Impasse

  • Settlement with Sete Brasil.
  • Magni to buy first two rigs.
  • Exploring options for remaining units.

Investment thesis

  • KEPPEL CORPORATION LIMITED (SGX:BN4)’s multi-business strategy shone when the property business continued to support earnings despite a downturn in the offshore marine segment. The group is well-positioned to benefit from a recovery in the oil and gas sector besides enjoying a buoyant property market.
  • Infrastructure remains a steady contributor while Investments is expected to see gains from asset disposals.

Settlement agreement with Sete Brasil; Magni wins bid –

  • Keppel O&M’s subsidiaries have entered into a settlement agreement with subsidiaries of Sete Brasil in relation to the EPC contracts for the six semi-submersible drilling rigs that were previously contracted.
  • Magni Partners have also successfully bid for four Sete Brasil rigs, including two by Keppel Corporation. These would be Urca and Frade, which are in advanced stages of completion of about 92% and 70% respectively.

Taking over ownership of four other rigs –

  • For the four remaining rigs, Keppel Corporation will take over ownership and explore various options to extract the best value from these assets. Among the four rigs that are in later stages of completion, we believe they could be sold to potential buyers, or co-owned with other parties for charter. Those that are in early stages of construction could be scrapped.

Net positive for Keppel Corp –

  • We are positive on this development as it allows Keppel Corporation to move forward from an impasse that has been going on for a number of years. As Magni is buying the first two rigs (additional work required for completion should add to Keppel Corporation’s orderbook), this reduces the risk of significant write-downs.
  • However, whether there would be further provisions or write-backs depend on the price Keppel Corporation can obtain in its negotiations with Magni, the portion of the US$260m undisputed debt Keppel Corporation can obtain in proceedings, as well as the final outcome for the remaining four rigs. Recall that Keppel Corporation has taken S$476m of cumulative provisions so far.

New order momentum healthier than prior year –

  • YTD, Keppel Corporation has secured new contracts of about S$2b, more than S$1.7b for the whole of 2018. Close to 60% of the new orders are for LNG and renewables related projects.

Higher net gearing at 0.82x; to keep below 1x –

  • Meanwhile, the group’s net gearing is still healthy 0.82x as at end Jun 2019; management is monitoring its net gearing such that it does not exceed 1x.
  • With broad-based market weakness as well as lower valuations for the group’s entities, we fine-tune our fair value such that it eases from S$7.83 to S$7.58.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-10-08
SGX Stock Analyst Report BUY MAINTAIN BUY 7.58 DOWN 7.830