Maybank stays downbeat on Keppel and SembMarine as Sete Brasil opts to go bust

Maybank Kim Eng is keeping its “negative” view on the offshore and marine sector following news earlier today that shareholders of Sete Brasil have opted for bankruptcy protection and put the application to the courts next week.

The way analyst Yeak Chee Keong sees it, investors need to know what kind of restructuring plans will be made.

“This may involve banks taking over the assets and liabilities and selling them to new investors. But more importantly, we need clarity on which contracts will remain intact, whether and how Keppel and Sembcorp Marine (SMM) would be paid,” writes Yeak in his Thursday note.

Keppel Corp has US$4.9 billion ($6.6 billion) worth of contracts with Sete Brasil, while SMM has a larger outstanding amount of US$5.6 billion.

“In our view, this overhang has not been completely removed and there are still uncertainties,” he adds.

To date, Keppel and SMM have taken $230 million and $329 million in provisions for their exposure to Sete Brasil. Yeak believes further write-downs will be needed. Also, the outstanding orders from Sete Brasil might need to be removed from the two companies’ order books.

In 1Q2016, the unrecognised portion of Sete Brasil contracts accounted for between 40% and 45% of Keppel’s net orderbook of $8.6 billion, and SMM’s $10.4 billion.

In the meantime, Yeak has already taken out these orders from his revenue forecasts for both companies. He warns of a gloomy road ahead. Besides Sete Brasil, there is a risk of other contract deferments and cancellations. Sure, oil prices have rebounded from the lows seen in January. However, the recovery isn’t sufficient to boost confidence leading to new rig orders.

“Investors who expect new orders to follow along with the oil price rally may be disappointed,” he states.

Yeak sees no new drilling rig orders over the next two years. “This would lead to the further cuts to consensus EPS estimates.”

Keppel closed 0.17% higher at $6. Sembcorp Marine closed 1.1% higher at $1.87.

This article first appeared in The Edge Singapore Market Report.

Read more: 5 Important Things You Need to Know About Keppel Corporation Before You Invest

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