Keppel Corp

DMG Research, June 25

KEPPEL has signed a conditional contract with Golar LNG (GLNG US, NR) to perform the world's first conversion of an existing Moss liquefied natural gas (LNG) carrier, the Hilli, into a floating liquefaction vessel (FLNGV).

We expect this conversion to be worth about S$750 million, according to media sources. Golar LNG expects the construction period to be 31 months.

Thus, this unit could be delivered as early as December 2016. Payment terms appear to be in line with past conversion projects. According to Golar LNG's management, the payment terms include "two larger payments on the front and back ends with progress payments as well".

Golar LNG has just successfully priced its follow-on offering of 110 million shares of common stock at US$54.00/share, raising about US$6 billion to: (i) fully fund initial milestone payments under a conditional agreement with Keppel, and (ii) partly fund future scheduled payments.

With financing now in place, the lights have turned green for the converting of two additional vessels - the Gimi and the Gandria, which appear to be sister vessels to the Hilli - into FLNGVs.

Golar LNG is a repeat customer. Keppel has successfully worked on three floating storage regasification units (FSRUs) for Golar LNG in the past, making it a repeat customer for floating natural gas vessels. This gives us confidence that the next two units might go to Keppel as well.

Keppel has won S$1.9 billion in contracts year-to-date, and these three FLNGVs could be worth another S$2.25 billion. Its offshore and marine division should maintain operational strength, although headwinds persist for its property and infrastructure arms.

We maintain BUY and S$12.45 TP. The 2014F 4.5 per cent dividend yield is a key attraction.

BUY