Keppel Corporation - The Beginning of the End of Its Upstream Foray

Date: 09/06/2021

Source  :  UOB KayHian
Stock  :  Keppel Corp       Price Target  :  6.37      |      Price Call  :  BUY
        Last Price  :  6.73      |      Upside/Downside  :  -0.36 (5.35%)

  • KrisEnergy (SGX:SK3)’s submission to wind itself up should not come as a surprise. With Keppel Corporation having appointed receivers, the key issue over the next year is to see if KrisEnergy’s upstream assets will be successfully sold. With the bulk of these being exploration assets, our channel checks indicate that the sale process will be challenging.
  • Keppel Corporation will book a loss of S$318m at its 1H21 results, offset somewhat by the equity gain from Floatel’s results.

KrisEnergy Submitted a Winding Up Petition

  • On 4 June after market close, KrisEnergy announced that it had submitted a winding up petition due to:
    1. lack of funds,
    2. its liabilities being greater than its assets, and
    3. the much lower-than-expected cash flow coming in from its new oil field offshore Cambodia.
  • This should not be a surprise to the market as KrisEnergy had already flagged to the market on 28 April and 31 March about the problems offshore Cambodia and the risk to the company ceasing to be a going concern.
  • Yesterday, prior to market opening, Keppel Corp announced that it had appointed Borelli Walsh as receivers over KrisEnergy’s assets.

What Now?

  • Given that Keppel Corporation (SGX:BN4) has first-ranking security over KrisEnergy’s assets, it will look to sell onshore Bangladesh seen as valuable.

Near-term Impact to Keppel Corp

  • For its upcoming 1H results, Keppel Corporation will book a S$318m loss against its exposure of S$423m based on results from Floatel.

Keppel Corp's Dividends Not Expected to be Affected

  • In the announcement, Keppel Corporation stated that 2021 dividends will be unaffected as it will ringfence the impairment loss on this non-core investment. We have kept our dividend forecast unchanged at S$0.12/share for 2021.

Potentially Problematic Sale of KrisEnergy's Assets

  • Looking at the chart in report attached below that detailing KrisEnergy’s assets, it is evident that the bulk would have been reduced by end-20 due to production.

We Retain Our BUY Rating on Keppel Corporation

  • We have lowered Keppel Corporation's earnings forecast for 2021 by 19% to S$435m as a result of the KrisEnergy-related losses, which has been offset by the equity gain due to Floatel’s results. Our earnings estimates for 2022-23 are unchanged.
  • Our SOTP-based target price of S$6.37 for Keppel Corporation is unchanged as it is based on the COVID-19 pandemic in 2021, we believe that this gap can narrow in the coming quarters.

Better Newsflow to Look Forward to

  • Going forward, Keppel Corporation’s China property segment should see better sales volume on the Marina East desalination plant which started operations in Jun 20, while potential upside may come from Keppel Corporation building upon the recent order win for a US$2.3b FPSO from Petrobras in May 21.

Catalysts to Keppel Corp's Share Price

  • Earnings-accretive acquisitions in the property space in China and Vietnam.
  • Successful sale of the company’s 5G rollout in conjunction with StarHub in mid-21.

Source: UOB Kay Hian Research - 9 Jun 2021

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Labels: Keppel Corp

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Chart Stock Name Last Change Volume 
Keppel Corp 6.73 -0.04 (0.59%) 5,420,400 

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