SINGAPORE (Oct 8): CGS-CIMB Research is keeping its “overweight” rating on the offshore & marine sector, following news that creditors – including Keppel Offshore & Marine (Keppel O&M) and Sembcorp Marine (SembMarine) – have finally reached a settlement with Sete Brasil.
Keppel Corporation subsidiary Keppel O&M on Monday morning announced that its wholly-owned subsidiaries, Fernvale and FELS Offshore, have entered into a settlement agreement with subsidiaries of Sete Brasil in relation to the Engineering, Procurement and Construction (EPC) contracts for the construction of six semisubmersible drilling rigs.
As part of the agreement, Fernvale will take over ownership of the four uncompleted rigs which arose from the performance of the EPC contracts.
As for two other rigs under construction, a total sum of close to US$260 million ($358 million) will be recognised as part of the undisputed debt included in Sete Brasil’s court-approved Judicial Reorganisation Plan.
See: Keppel reaches settlement with Sete Brasil on semisubmersible drilling rigs
SembMarine later in the day followed with its own announcement that it had reached a settlement with Sete Brasil over seven drillship contracts.
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The contracts, secured by various SembMarine subsidiaries from Sete Brasil’s subsidiaries, were worth a total of US$5.6 billion.
For five out of seven of the drillships, SembMarine will retain all the works performed.
Sete Brasil was noted to have identified a purchaser for the two remaining drillships, which have the most advanced construction progress.
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The purchaser is expected to negotiate with Sembcorp to enter into new contracts to complete the drillships.
See: Sembcorp Marine reaches settlement with Sete Brasil over drillship contracts
“Magni Partners (Magni), the investment company of Borr Drilling founder Tor Olav Troim, has struck a deal with Sete Brasil and its creditors to buy four unfinished ultra-deepwater rigs from Keppel and SembMarine’s two Brazilian yards,” says CGS-CIMB analyst Lim Siew Khee in a flash note on Monday.
She notes that these rigs will be chartered to Petrobras at US$299,000 per day over a 10-year lease.
“We estimate a range of US$102 million to US$316 million of new contracts each for Keppel and SembMarine to complete the Sete Brasil rigs for Magni Partners,” Lim says.
“On a more bullish note, the remaining two advanced completed rigs could also be translated to close to US$1 billion of new contracts each if there are new buyers,” she adds.
According to Lim, Keppel’s order book stood at $5.5 billion as of 1H19, with $1.9 billion of orders year-to-date, while SembMarine’s order win totalled $575 million with an estimated order book of close to $2.5 billion.
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CGS-CIMB is keeping its “add” call on Keppel Corp with an unchanged target price of $8.41 – representing an upside of more than 42% from its closing price of $5.91 on Monday.
“Keppel is trading at undemanding valuations of 0.9x CY19F P/BV, or -1 s.d. of its 10-year mean,” Lim says. “We see opportunity to accumulate for long-term investors. Yield is now decent at 4.2%.”
Meanwhile, the brokerage has a “hold” recommendation on SembMarine with a target price of $1.26.
“SembMarine is trading at 1.1x CY19F P/BV (below -1 s.d. of 10-year mean),” Lim says. “We think 3-month 20% share price weakness has priced in the guided losses for FY19F.”
As at 12.30pm on Tuesday, shares in Keppel Corp are trading 3 cents higher at $5.94 while shares in Sembcorp Marine are trading 2 cents higher at $1.21.
