Skip to content

Keppel Corp Analysis Essay

GENERAL DISCLOSURE/DISCLAIMER

GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by DBS Bank. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank.      

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. 

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. 

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere.
There is no planned schedule or frequency for updating research publication relating to any issuer. 

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: 

(a)   such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and

(b)  there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. 

DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.


RESTRICTIONS ON DISTRIBUTION

General

This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. 

Australia

This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”). DBS holds Australian Financial Services Licence no. 475946.

DBSVS is exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. DBSVS is regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws.

Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.. 

Hong Kong

This report has been prepared by a person(s) who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).   This report is being distributed in Hong Kong and is attributable to DBS Vickers Hong Kong Limited, a licensed corporation licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). 

For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at equityresearch@dbs.com.

Indonesia

This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

Malaysia

This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.



Wong Ming Tek, Executive Director, ADBSR 

Singapore

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report. 

Thailand

This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it. 

United Kingdom

This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore. 

This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. 

In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication. 

Dubai International Financial Centre

 

This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it. 

United Arab Emirates

This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent.

United States

This report was prepared by DBS Bank Limited. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate. 

Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. 



SINGAPORE
DBS Bank Ltd
Contact: Janice Chua
12 Marina Boulevard,
Marina Bay Financial Centre Tower 3
Singapore 018982
Tel: 65 6878 8888
Fax: 65 65353 418
e-mail: equityresearch@dbs.com
Company Regn. No. 196800306E

HONG KONG
DBS Vickers (Hong Kong) Ltd
Contact: Paul Yong
18th Floor Man Yee Building
68 Des Voeux Road Central
Central, Hong Kong
Tel: 65 6878 8888
Fax: 65 65353 418
e-mail: equityresearch@dbs.com
Participant of the Stock Exchange of Hong Kong

MALAYSIA
AllianceDBS Research Sdn Bhd
Contact: Wong Ming Tek (128540 U)
19th Floor, Menara Multi-Purpose,
Capital Square,
8 Jalan Munshi Abdullah 50100
Kuala Lumpur, Malaysia.
Tel.: 603 2604 3333
Fax:  603 2604 3921
e-mail: general@alliancedbs.com

 

THAILAND
DBS Vickers Securities (Thailand) Co Ltd
Contact: Chanpen Sirithanarattanakul
989 Siam Piwat Tower Building,
9th, 14th-15th Floor
Rama 1 Road, Pathumwan,
Bangkok Thailand 10330
Tel. 66 2 657 7831
Fax: 66 2 658 1269
e-mail: research@th.dbsvickers.com
Company Regn. No 0105539127012
Securities and Exchange Commission, Thailand


INDONESIA
PT DBS Vickers Sekuritas (Indonesia)
Contact: Maynard Priajaya Arif
DBS Bank Tower
Ciputra World 1, 32/F
Jl. Prof. Dr. Satrio Kav. 3-5
Jakarta 12940, Indonesia
Tel: 62 21 3003 4900
Fax: 6221 3003 4943
e-mail: research@id.dbsvickers.com

 

Shares of mainboard-listed Keppel Corporation will likely see knee-jerk selling when stock markets reopen after the Christmas holidays as investors react to news of its staggering US$422.2 million (S$567 million) penalty.

After all, the fines agreed to in the global resolution were "much bigger than expected", and will likely hammer at Keppel's full-year earnings, KGI Securities Singapore analyst Joel Ng told The Sunday Times.

"As a group, Keppel will probably still remain profitable for the whole of 2017, although earnings could shrink by around 70 per cent," he noted.

The stock closed 0.3 per cent or two cents up at $7.47 on Friday, before the announcement was made.

UOB Kay Hian analyst Foo Zhiwei has a more optimistic take, noting that the financial impact could be "negligible", with full-year earnings declining by at most 1 per cent. This would be largely due to higher interest expense that is expected from rolling forward working capital loans on its stranded rig assets.

"The silver lining is that Keppel has managed to make a lot of divestments this year, which could translate to at least $561 million in divestment gains. So at the group level, the impact (of the fines) would be somewhat offset," said Mr Foo, citing the sales of its stakes in the Keppel Cove and Nantong developments in China.

DIVESTMENT GAINS

The silver lining is that Keppel has managed to make a lot of divestments this year, which could translate to at least $561 million in divestment gains. So at the group level, the impact (of the fines) would be somewhat offset.

UOB KAY HIAN ANALYST FOO ZHIWEI

In a statement yesterday, the US Department of Justice said that Keppel O&M had engaged in a scheme between 2001 to 2014 to pay US$55 million in bribes to Petrobras officials and the then governing political party in Brazil, the Workers Party of Brazil. Court documents stated that the bribes were paid to win 13 contracts with Petrobras and Sete Brasil. In total, the company earned US$351.8 million through the bribery scheme.

Keppel in its statement yesterday said it will make a provision for the US$422.2 million in fines in the current financial year, which constitute an extraordinary item and will have a one-off impact on the group's earnings.

Based on the latest statements for the financial year ended 2016, had the fines been imposed on Dec 31 last year, the net asset per share as at Dec 31, 2016, would have decreased from $6.34 (before the fines) to $6.03 (after the fines).

Had the fines been imposed on Jan 1 last year, the earnings per share for the 2016 fiscal year would have dropped from 43.2 cents (before the fines) to 11.7 cents (after the fines).

Keppel added that if the fines had been paid at the end of December 2016, net gearing would have risen from about 0.565 times then to around 0.64 times, representing an increase of about 7.5 per cent.

  • Where will the US$422.2m go?

  • As part of the global resolution led by the United States Department of Justice (DOJ) in discussion with Brazil and Singapore, Keppel Offshore & Marine (Keppel O&M) will pay US$105.6 million (S$142 million) to the US.

    This includes a US$4.7 million criminal fine on Keppel O&M USA. Brazil will receive US$211.1 million or 50 per cent of the total criminal penalty of US$422.2 million. Singapore will receive up to US$105.6 million or 25 per cent, the DOJ said in a statement yesterday.

    Keppel O&M also received a 25 per cent reduction of the fine under the US Sentencing Guidelines - the maximum cooperation and remediation credit possible.

    In Singapore, Keppel O&M has been served a conditional warning, partly for the "substantial cooperation" it rendered to the investigations - including reporting the crime to the Attorney-General's Chambers (AGC) and the Corrupt Practices Investigation Bureau (CPIB), and the extensive remedial measures taken.

    A conditional warning typically includes an undertaking not to commit any further offence for a stated period.

    A spokesman for the AGC said: "Breach of the conditions may lead to prosecution for both the new offences as well as the one/s that were the subject of the conditional warning."

    Under the conditional warning, Keppel O&M will pay Singapore US$52.8 million within 90 days from the date of the conditional warning, and a further US$52.8 million within three years from the date of the warning, less any penalties paid to the Brazilian authorities during this period.

    In a Keppel statement yesterday, chief executive Loh Chin Hua said that the past practices uncovered at Keppel O&M do not reflect how the Keppel Group conducts business today. "Keppel does not just care about results, we care deeply about how our results are achieved. We have zero tolerance for corruption," he said. He noted that the settlement means Keppel can now "draw a line under this difficult issue" and look to the future.

    "It has been a very painful chapter for Keppel and the thousands of hard-working and honest colleagues we employ in Singapore and around the world. We must now work hard to win back the trust our stakeholders have placed in us and demonstrate our determination to hold ourselves to the highest ethical standards everywhere we operate," said Mr Loh.

    Jacqueline Woo

That said, the resolution could be good for Keppel in the longer term, given that the corruption probe had been hanging like a sword of Damocles over its head. This clears up much of the uncertainty and the damage to profit is crystallised.

"On a positive note, at least there is closure to this issue. Keppel has the balance sheet to survive this, even as its offshore and marine side will be heavily impacted in the short term," said Mr Ng.

Final dividends are not expected to be hit as a direct result of the fines as Keppel had given the assurance that the one-time penalty will be ring-fenced. Still, Mr Foo believes the dividends could come in slightly lower this year, with Keppel likely to take a more prudent stance.

Beyond the financial damage, the incident could also put a huge dent in Keppel O&M's reputation as the world's No.1 rig-builder. But Mr Ng noted that with the near-term outlook still cloudy for the industry, the big oil projects will likely take at least another year or two to come in. This means that "by then, the impact of this incident may be minimal".