Singapore Shipyards - DBS Research 2019-10-08: Closing The Sete Chapter

KEPPEL CORPORATION LIMITED (SGX:BN4) SEMBCORP MARINE LTD (SGX:S51) SEMBCORP INDUSTRIES LTD (SGX:U96)

Singapore Shipyards - Closing The Sete Chapter

Settlement reached with Sete on the 13 rig contracts - removes last major overhang on undelivered rigs.
Potential write-back if further payment is received from Sete.
Expect a lift in orderbook for remaining works to complete the first four rigs for buyer Magni.
Transfer of ownership of remaining uncompleted units provides opportunity to recoup some cost.

Singapore shipyards – KEPPEL CORPORATION LIMITED (SGX:BN4) and SEMBCORP MARINE LTD (SGX:S51) - have both announced the settlement agreement with Sete Brasil (Sete) for 13 rig orders (Keppel: six semisubmersible rigs; Sembcorp Marine: seven drillships) contracted in 2011-2012. See Keppel Corp's announcements; Sembcorp Marine announcements.

The four rigs in the most advanced construction stages - two from each yard - will be sold to Magni Partners (Magni), while ownership of the remaining uncompleted rigs will be transferred to the shipyards.

The settlement removes the last major overhang of undelivered rigs for the Singapore shipyards. The yards have made provisions in relation to these Sete rigs and it is unlikely to incur further provisions arising from this settlement. In fact, there could be potential writebacks, if the yards are able to recoup some of the outstanding receivables from Sete. Keppel disclosed in its announcement that a total sum of ~US$260m will be recognised as part of the undisputed debt included in Sete Brasil's Judicial Reorganisation Plan, which has been approved by the court. See Keppel Corp's announcements.
We could also expect orderbook accretion for the remaining works to complete the four rigs acquired by Magni. Both yards are currently in negotiations with Magni to finalise terms to complete those rigs. Based on the original contract value of ~S$1bn per rig, it may require another S$600-800m to complete these units, taking a ballpark estimate.
The subsequent four units are already 20-60% completed (refer to table on the right), which includes procurement and commencement of construction works. Once the settlement agreement is effective, the shipyards could proceed to seek buyers and complete the rigs. Otherwise, disposing or scrapping these half-built units could be another option. The last five units are only < 10% completed, which is negligible as construction work has yet to have commenced at this stage.
See Keppel Corp share price; Sembcorp Marine share price.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2019-10-08

SGX Stock Analyst Report BUY MAINTAIN BUY 8.500 SAME 8.500

BUY MAINTAIN BUY 1.900 SAME 1.900

BUY MAINTAIN BUY 3.200 SAME 3.200