In fact, the shares moved first before the news announcement.
From the chart, the bottom is around $4.80. Unlikely it will touch that point again, depending on macro environment.
Perhaps $5.30 can try to get some again for long term investment.
Keppel Corporation (KEP SP) BUY
Price/Tgt: S$5.77 / S$6.60 Mkt Cap: US$7,556m 52-wk avg daily value: US$29m 1-Yr Hi/Lo: S$9.54/S$4.64
Transocean Delays its 5 Jack-Up Rig Orders to 2020
Analysts: Nancy Wei / Foo Zhiwei Tel: (65) 6590 6628/6626
What's New?
- Transocean made an announcement on its website yesterday afternoon regarding its 5 jack-up rig orders with Keppel Corp.
- Delivery for all 5 jack-ups will now be in 2020, with the units to be delivered in 2-3 month intervals beginning 1Q20.
- This is not the first deferral. Transocean had earlier deferred delivery last year to 2018-2020 (original contract schedule: 2016-2017), with each rig being delivered over a 6-month interval.
Our Take
- Immediate impact is a deferral of revenue recognition to the right. We estimate projected O&M revenue for 2016, 2017 and 2018 to decline by 2%, 6% and 3% respectively.
- Given Keppel's sizeable group net profit of S$1.5b, the trickle-down effect of the O&M revenue loss on earnings is minimal. We estimate group net profit for 2016-18 to decline by 1-2%.
- We do not see any cancellation risks for now, given Transocean's long-track record in the rig operators' arena and relationship with Keppel.
Valuation/ Recommendation
Maintain BUY, with target price of S$6.60. We like Keppel for its diversified businesses, which has provided a strong earnings buffer amidst the downturn plaguing its Offshore business unit. Recent share price run up no longer yields the O&M unit for free, but implies a 50% discount to the O&M unit. With its O&M orderbook likely to remain intact given its Tier-1 clientele profile, we do not see cancellation risks for now that would result in asset impairments that might befall its peer SMM. Coupled with a decent dividend yield of 5.6% and strong cashflow generation from its other businesses, the current share price pull-back represents an opportunity to accumulate. Stock is currently trading below book at 0.9x 2017F P/B, with an ROE of 11%. BUY after a share price pull-back.
