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.
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.
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".