According to a 6 Feb 2015 article by Upstream, Brazil’s national development bank BNDES has postponed a US$3.2b credit lifeline for several Brazilian shipyards; this comes after news reports in mid Jan that BNDES would disburse loans to Sete Brasil for rig payments. This is negative news for Keppel Corp (KEP) as it affects the ability of Sete Brasil to make payments to its yards. KEP could see a delay in receiving payments, or worse still, there could be order cancellations. We estimate that Sete Brasil and Petrobras account for 40-50% of KEP’s order book. With the recent appreciation of KEP’s share price, there is now only a ~10% upside to our original fair value estimate of S$9.14. As the Brazilian situation is still fluid, we advise caution at this stage, and lower our P/E for the O&M segment from 13x to 12x due to increasing downside risks. As such our SOTP-based fair value estimate falls to S$8.65. Downgrade to HOLD.
BNDES halts US$3.2b loan to Sete Brasil
According to a 6 Feb 2015 article by Upstream, Brazil’s national development bank BNDES has postponed a US$3.2b credit lifeline for several Brazilian shipyards following press reports suggesting that Sete Brasil was involved in the corruption of a network now known to have engulfed the whole contracting and procurement process at Petrobras. This comes after news reports in mid Jan that BNDES would disburse loans to Sete Brasil for rig payments.
Potential impact on KEP
This is negative news for Keppel Corp (KEP) as it could see a delay in receiving payments from Sete Brasil, or worse still, order cancellations. We estimate that Sete Brasil and Petrobras account for 40-50% of KEP’s order book. 85% of the first semi-sub for Sete Brasil has been completed, 50% for the second and 25% for the third. KEP, however, has not disclosed the amount of cash received from Sete Brasil with regards to these orders so far. The average contract price for each semi-sub secured by KEP from Sete Brasil was US$800m in 2012, higher than average at that time due to the local content requirement. The question is how much these rigs will fetch now should they be sold in the open market, if Sete Brasil cancels the orders. This is especially so during this current down market.
Refuted bribery allegations
Meanwhile, KEP has refuted claims that Keppel FELS had paid bribes to Petrobras directors and PT (Partido dos Trabalhadores, Brazil’s Workers’ Party). The scandals and difficulties plaguing Petrobras are unlikely to be over soon and are likely to continue to cast a pall over Keppel Corp.
Downgrade to HOLD
With the recent appreciation of KEP’s share price, there is now only a ~10% upside to our original fair value estimate of S$9.14. As the Brazilian situation is still fluid, we advise caution at this stage, and lower our P/E for the O&M segment from 13x to 12x due to increasing downside risks. As such our SOTP-based fair value estimate falls to S$8.65. Downgrade to HOLD.
According to a 6 Feb 2015 article by Upstream, Brazil’s national development bank BNDES has postponed a US$3.2b credit lifeline for several Brazilian shipyards following press reports suggesting that Sete Brasil was involved in the corruption of a network now known to have engulfed the whole contracting and procurement process at Petrobras. This comes after news reports in mid Jan that BNDES would disburse loans to Sete Brasil for rig payments.
Potential impact on KEP
This is negative news for Keppel Corp (KEP) as it could see a delay in receiving payments from Sete Brasil, or worse still, order cancellations. We estimate that Sete Brasil and Petrobras account for 40-50% of KEP’s order book. 85% of the first semi-sub for Sete Brasil has been completed, 50% for the second and 25% for the third. KEP, however, has not disclosed the amount of cash received from Sete Brasil with regards to these orders so far. The average contract price for each semi-sub secured by KEP from Sete Brasil was US$800m in 2012, higher than average at that time due to the local content requirement. The question is how much these rigs will fetch now should they be sold in the open market, if Sete Brasil cancels the orders. This is especially so during this current down market.
Refuted bribery allegations
Meanwhile, KEP has refuted claims that Keppel FELS had paid bribes to Petrobras directors and PT (Partido dos Trabalhadores, Brazil’s Workers’ Party). The scandals and difficulties plaguing Petrobras are unlikely to be over soon and are likely to continue to cast a pall over Keppel Corp.
Downgrade to HOLD
With the recent appreciation of KEP’s share price, there is now only a ~10% upside to our original fair value estimate of S$9.14. As the Brazilian situation is still fluid, we advise caution at this stage, and lower our P/E for the O&M segment from 13x to 12x due to increasing downside risks. As such our SOTP-based fair value estimate falls to S$8.65. Downgrade to HOLD.
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