Rig-builders get a roasting in wake of fines on KepCorp unit

Keppel employees watch the delivery ceremony of their semi-submersible accommodation rig to Floatel at their shipyard in Singapore.
Keppel employees watch the delivery ceremony of their semi-submersible accommodation rig to Floatel at their shipyard in Singapore.PHOTO: REUTERS

Investors gave the two rig-builders a post-Christmas roasting yesterday on news of the US$422 million (S$567 million) in fines imposed on a unit of Keppel Corporation over corrupt contract payments.

Keppel Corp traded at an intra-day low of $7.09, down 38 cents, or 5.1 per cent, from Friday's close of $7.47, before ending at $7.29.

SembMarine closed at $1.87 after paring some loss from an intra-day low of $1.85, but the stock was down seven cents, or 3.6 per cent, from Friday.

About nine million shares in both counters were traded.

At face value, the declines were "muted", considering the size of the fines meted out to Keppel Offshore and Marine (Keppel O&M), said a broker, who cited the absence of short-sellers during the Christmas holiday as possibly contributing to this.

UOB Kay Hian analyst Foo Zhiwei described the sell-down in Keppel Corp as "a knee-jerk reaction".

  • $7.29

    Keppel Corp's price yesterday, down from Friday's close of $7.47.

    $1.87

    SembMarine's closing price, down seven cents from Friday.

"Sell first, ask later. That is probably the mentality right now," he said, adding that investors may be reacting to the uncertainty over the repercussions on KepCorp.

The fines have spawned fresh concerns for SembMarine over how far it can withstand the exposure to corruption probes pertaining to contracts awarded to its Brazilian unit.

OCBC analyst Low Pei Han noted that the agents of both the Brazilian units of SembMarine and Keppel O&M have been accused of making corrupt payments.

"The market is likely to also focus on whether SembMarine will face a similar penalty," added Ms Low, who noted that the fines of US$422 million would represent about 22.6 per cent of SembMarine's third-quarter net asset value, compared with just 4.5 per cent for KepCorp.

Ms Low has downgraded SembMarine to sell and lowered the stock's fair value from $2.26 to $1.74.

While KepCorp may boast a stron-ger balance sheet, the slide in its share price has split observers over whether the market is fully convinced by its "multi-business" pitch.

 
 
 

One said its relatively "muted" stock price movement was a sign the market is sold on the idea that its property business would make up for the slack from its offshore and marine business.

But Keppel O&M garnered as much as $10 billion in new contracts in 2011 and 2012. "Sales from the property business can't replace contracts on this scale," a source said.

Both KepCorp and SembMarine have also maintained that they had adequately provided for the rigs that have not been delivered from their order books. Yet, it is inevitable that resale of rigs may at times compromise margins.

SembMarine confirmed a US$500 million sale of a semi-submersible rig yesterday. The transaction will result in a $24 million loss in addition to the provision the firm has already extended in the 2015 financial year.

Correction note: This story has been edited for clarity. 

A version of this article appeared in the print edition of The Straits Times on December 27, 2017, with the headline 'Rig-builders get a roasting in wake of fines on KepCorp unit'. Print Edition | Subscribe