Singapore Offshore & Marine – Singapore Rig Builders – Additional Working Capital Is Manageable

Latest newswire reports suggest Keppel Corp and SMM may have agreed to finance the first two rigs for Sete Brasil to facilitate their completion. We estimate an additional working capital of S$300m-350m per yard, which we deem to be a manageable sum. Our top stock picks remain SCI, Ezion Holdings and Triyards. Maintain MARKET WEIGHT.

WHAT’S NEW
Keppel and SMM to finance their first two rigs? Details have emerged on a possible refinancing plan for Sete Brasil. According to Folha de S. Paulo and Reuters, shareholders in Sete Brasil will extend up to US$5b in financing. The monies will be provided by state lenders Banco de Brasil SA and Caixa Econômica Federal, as well as private-sector lenders Itaú Unibanco Holdings, Banco Bradesco, and Banco Santander Brasil. As part of the plan, Keppel (KEP) and Sembcorp Marine (SMM) are said to likely finance two rigs each on their own. The plan will be submitted for approval to the banks’ respective boards. First disbursement will happen roughly in late Oct-15. Sete Brasil is likely to reduce its rig construction plan from 29 to 15, with KEP and SMM maintaining their orders of 6 and 7 rigs respectively.

STOCK IMPACT
Manageable additional working capital, as first two rigs are substantially completed. As of end-Apr 15, SMM’s drillship Arpoador (originally scheduled for delivery in May 15) was 81.5% completed while its second drillship Guarapari (to be delivered in Jul 16) was 61.8% completed. As for Keppel, as of end-Apr 15 its first semisubmersible rig Urca (this semi is scheduled for delivery in Jul 16) was 88.2% completed while its second semi Frade (to be delivered in May 17) was 60.3% completed. While Sete Brasil’s progress payments for rigs that have commenced construction are in arrear, Keppel and SMM have indicated the entire building programmes (7 drillships by SMM and 6 semis by Keppel) are net cashflow positive as deposits have been paid for rigs that have yet to commence construction.

During the 1Q15 results announcements, KEP and SMM had shared that they were cash-positive on their projects with Sete Brasil, since payment stopped in Nov 14. KEP has received US$1.3b for the first three rigs, and 10% downpayment for the remaining three. SMM did not disclose the amount received in cash, and reported arrears of about S$160m on their drillship projects.

As the first two rigs for each yard have staggered delivery dates, the required additional working capital is somewhat mitigated. Furthermore, deposits have been collected for rigs that have not commenced building. Currently, SMM has not commenced construction for 3 drillships while Keppel has not started building for one semi. We estimate an additional working capital requirement of S$300-350m per yard. On the flip side, there are paid deposits of S$100m and S$300m to Keppel and SMM respectively on units that have yet to commence construction. We believe the additional working capital requirement is manageable given Keppel’s and SMM’s current net gearing position of 0.41x and 0.29x as of end 1Q15.

ACTION
A major positive if Brazil saga is resolved. A quarter of our projected 2016 net profit is from its drillships for Sete Brasil while a smaller 9% of Keppel’s projected 2016 earnings are from Brazil. More importantly, SMM has invested about S$1b in its new yard in Brazil. A solution to Sete Brasil’s financial gridlock would be a major positive for both the Singapore rig builders. However, both groups still need to ride through the current downturn of the global O&G industry. Our top stock picks in the Singapore offshore & marine (O&M) sector remain Sembcorp Industries (SCI), Ezion and Triyards.

ASSUMPTION CHANGES / CATALYSTS / RISKS
Maintain stock recommendations. Our target price revisions using a 1-year forward P/B methodology as shown below. 

The key risks in the entire sector are: 
a) protracted low oil prices, and 

b) another fall in oil prices. Both could cause oil companies to see another round of spending cuts. (Read Report)

Source : UOB KayHian Research

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