Keppel Corp Post-Results (DBS Credit Research)

"Keppel released their 4Q15 results yesterday, despite weaker YOY numbers (FY15 Rev -22.5% YOY, NPAT -19% YOY, Operating margins 14.7% vs last year 17.9%), Net gearing increased from 0.11 times to 0.53 times (Management guided that it would like to maintain below 1 times). During the analyst briefing yesterday evening, concerns were mainly about Sete Brasil which could be a risk to the firm. Keppel was tight lipped about revenues recognized so far related to Sete Brasil, but they have taken a SGD230m provision in relation to the contracts which they feel is adequate at this point in time (after factoring payments owed to Keppel and payments owing to Keppel’s own contractors). They mentioned that if a bankruptcy order is pushed through, the process is expected to be long drawn and an early resolution is unlikely (DBS think further provisioning and unwinding of revenues would be necessary). On the bright side, 4Q15 showed that O&M margins (excluding Sete Brasil provisioning was 17%) which is very strong. Management guided that this is one off (due to project mix for the Q) and a longer term normalised margin guidance which has been provided at 10-12% is tough to achieve today. Meantime, the group thinks they are adequately capitalised, sufficiently diversified across businesses and said that the current market weakness could present more acquisition opportunities. Management also seemed to be nonchalant about market rumors whether SMM and Keppel / SCI could merger. But Keppel said they are still right sizing the O&M business according to the market, so far they have laid off a total of 17% of their workforce and 25% of subcontractor workforce making job losses of 6,000 perm staff and 7,900 contract staff). Net order book is at SGD9B as of end 2015. Enquiry flow on LNG projects like FSRU and FLNG remains healthy.

Sete Brasil shareholder meeting was held yesterday but insufficient majority (requirement of 85%) to file for bankruptcy. Majority of shareholders except two Petrobras Pension Fund (18%) and Bank Santander (6%) voted against bankruptcy. This could be positive in the interim, as it buys the firm more time to work out arrangements. Expected follow up meeting to be held in 30 days."