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Keppel, SembMarine shares hit by fines slapped on Keppel unit

Analyst downgrades SembMarine over its exposure to Brazilian contracts

Jeffery Chow, a former senior member of Keppel Offshore & Marine Ltd's legal department, cut a deal to help prosecutors in their probe of Keppel and other former executives, according to the documents unsealed on Tuesday in federal court in Brooklyn.


KEPPEL Corp shares fell as much as 5.1 per cent on Tuesday following news that its offshore and marine unit had been slapped with fines totalling US$422 million relating to corrupt payments made by a former Keppel agent in Brazil.

The shares of Singapore's other big O&M group, Sembcorp Marine, were also caught in the fallout, as analysts turn their attention to its exposure to the Brazilian market.

But both counters showed resilience despite a generally weaker market. Keppel Corp hit an intra-day low of S$7.09, down 38 cents or 5.1 per cent from a previous close of S$7.47, before recouping half the losses to end the day at S$7.29, for a net loss of 18 cents. SembMarine finished at S$1.87 after reaching the day's low of S$1.85, down seven cents or 3.6 per cent from the previous close of S$1.94.

Over 9.1 million and 8.8 million shares changed hands in Keppel Corp and SembMarine respectively.

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Brokers said that given the size of the fines, the market's reaction seems "muted". They said selling pressure could have been kept at bay by short-sellers being away for the Christmas holidays. They added that those who wanted out of O&M exposure may have already exited the counters during the height of the offshore and marine downturn.

The recent upswings in the two stocks along with improved oil prices could also have shielded them from a sell-off.

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

"Sell first, ask later. That's probably the mentality right now," he said, adding that investors may be uncertain about the repercussions on Keppel Corp.

For SembMarine, the announced fines have spawned fresh concerns over how far the yard group can withstand the exposure to corruption probes pertaining to contracts awarded to its Brazilian unit.

The scale of fines slapped on Keppel Offshore & Marine has prompted one analyst to downgrade Sembcorp Marine to a "sell", given the yard group's extensive exposure to the Latin American country.

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.

"With this latest development, the market is likely to also focus on whether SembMarine will face a similar penalty."

Ms Low added that the US$422 million in fines would represent about 22.6 per cent of SembMarine's third quarter net asset value (NAV). This compared to the fines accounting for just about 4.5 per cent of Keppel Corp's Q3 NAV.

Ms Low has thus downgraded SembMarine to a "sell" and lowered the fair value for the stock to S$1.74 from S$2.26.

But while Keppel Corp may boast a stronger balance sheet that can weather the fines, the slide in its share price on Tuesday has seen observers split over whether the market is fully convinced by its "multi-business" pitch.

One observer argued that Keppel Corp's relatively "muted" stock price movement is a sign that the market is sold on the idea that the group's property business would make up for the slack from its O&M business.

Keppel O&M garnered as much as S$10 billion in new contracts in 2011 and 2012.

"Sales from the property business can't replace contracts on this scale," one source said, though noting that Keppel Corp has a good enough landbank "to keep going for the next five to 10 years".

Both Keppel Corp 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.

On Tuesday, SembMarine confirmed a US$500 million deal for the resale of the West Rigel semi-submersible rig. The transaction, when concluded, will result in a S$24 million loss in addition to the provision the yard group has already extended in FY15.

Between the two yard groups, SembMarine has divested most of its undelivered rigs save for the drillships placed by Sete Brasil and leading drilling contractors, Transocean.

Keppel Corp has extended provisions for its Sete Brasil rig-building contracts and its Can Do drillship.

Several analysts in noting the calibre of the clients for the balance rigs on Keppel Corp's order book have argued that the multi-business conglomerate has thus far, extended adequate provisions.


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