SINGAPORE (Dec 26): OCBC is maintaining its longer-term "buy" rating on Keppel Corporation with upside potential of 11.1% although there is likely to be a negative knee-jerk reaction on the share price.
This comes after Keppel announced on Saturday that its Keppel Offshore & Marine unit has reached a global resolution with the criminal authorities in the US, Brazil and Singapore, bringing closure to the investigations into corrupt payments by a former agent, Zwi Skornicki, in Brazil.
Keppel O&M will pay fines totalling US$422 million ($570 million) to the three jurisdictions, representing a 25% discount off the bottom of the applicable fine range under US sentencing guidelines, the maximum cooperation and remediation credit allowed.
In a Tuesday report, lead analyst Low Pei Han says this is not a large impact on OCBC's fair value as the house is valuing Keppel's O&M segment at just 1.1 times book as most of the group’s value is still from the property segment.
"After adjusting our O&M book value lower and updating the values of the group’s other business segments, our fair value estimate slips to $8.12 from $8.41," says Low.
"We estimate that the fine of $570 million accounts for about 4.5% of KEP’s 3Q17 net asset value, and KEP has the financial resources to pay the penalty," says Low Pei.
Keppel will make a provision in the current financial year, meaning that the impact will be seen in the 4Q17 results.
If the fines had been paid at the end of Dec 2016, Keppel's net gearing would have increased from about 0.565x then to around 0.64x, an increase of about 750 basis points.
As this is an extraordinary event, Keppel will ring-fence the financial penalty when considering the final dividend to propose for the current year.
Shares in Keppel are down 25 cents at $7.22 or 15.4 times FY18 forecast earnings.
