Keppel Corporation - RHB Invest 2019-10-07: Reaches Settlement With Sete Brasil; Stay BUY


Keppel Corporation - Reaches Settlement With Sete Brasil; Stay BUY

  • Maintain BUY and SGD7.30 Target Price, 26% upside, plus c.4% yield.
  • Keppel Corp has entered into a settlement agreement with Sete Brasil for the EPC contracts for the construction of six semisubmersible drilling rigs. We view the development positively as it paves the path for EPC works to continue, and for the eventual deployment of the semisubmersibles.

Keppel will take over ownership of four uncompleted rigs

  • KEPPEL CORPORATION LIMITED (SGX:BN4) will take over ownership of four uncompleted rigs that arose from the EPC contracts with Bracuhy, Portogalo, Mangaratiba and Botinas. These contracts with Sete Brasil Participacoes SA will be deemed amicably terminated, with no penalties, or refunds, and the parties will waive all rights to any claims.
  • Works done with Bracuhy, Portogalo are 40% and 21% completed, whilst the Mangaratiba and Botinas are < 10% completed. Keppel will be able to explore all options to extract the best value from these assets.

Urca and Frade will be sold to Magni Partners.

  • For Urca and Frade, a total sum of USD260m will be recognised as part of the undisputed debt included in Sete Brasil’s Judicial Reorganisation Plan. Sete Brasil’s creditors have approved the sale of four rigs (including Urca and Frade) to Magni Partners. The settlement agreement will only become effective upon fulfilment of all conditions, including the successful sale of Urca and Frade by Sete Brasil to Magni Partners.
  • Keppel is in talks with Magni Partners on the terms to complete the construction of the rigs contracted with Urca and Frade, which are 92% and 70% completed respectively.

Valuation – diversified asset structure with huge value unlocking potential.

  • We took the SOP methodology to value Keppel, and arrived at Target Price of SGD7.30 based on:
    • the O&M division valued at 1.8x P/BV – a premium over its 4-year average; 1.5x P/BV of SEMBCORP MARINE LTD (SGX:S51) (BUY, Target Price: SGD1.63, see report: Sembcorp Marine - Early Signs Of Order Win Recovery);
    • infrastructure division valued conservatively at 10x FY19F P/E;
    • property division valued at 40% discount to RNAV – close to the average discount to RNAV applied for China listed property developers; and
    • investment division, which includes Keppel T&T Ltd, Tianjin Eco-City, and M1 td.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-10-07
SGX Stock Analyst Report BUY MAINTAIN BUY 7.300 SAME 7.300