KEPPEL CORP: News ahead is likely to be negative

KepCorp: Now that the counter has visited the low end of my expected range of $6.50 to $6.30 and rebounded to the $7 level, what comes next?

The biggest customer for offshore rigs of recent times, Brazil, continues to head into deeper troubled waters as its China dependent economy suffers from the dragon's bout of flu. Rounds & rounds of prescription have not been able to bring relief & the dragon seems incapable of being its fiery self for a while yet.

Petrobras had already twice delayed deliveries of its order for several units of rigs, pushing some to as far as 2019. As of the last update, it had not been making new payments for the work progressed and KepCorp was about to exhaust the earlier payments that it had received, meaning KepCorp itself will have to fund further work with no indication of payment.

Or it can choose to suspend further work.

Together with the practically non-existent prospect for any new order for rigs, KepCorp may be driven to explore other work so as to help relief its high fixed cost burden. A company I previously worked for in the fabrication & installation of offshore structures, facing such a slump, resorted to take on non-traditional work - fabricating the roof for the largest column-free aircraft hangar in the world at our Changi Airport. Ended up a very unhappy experience, financially.

So, like SembMarine, KepCorp may be forced to undertake conversions and low-margin work.

But until then, it faces the daunting prospect of having to impair its huge investments in its facilities for rig building and in its work-in-progress or billings for work progressed.

Just today I read about Dukang Distillers recognising impairment loss of over S$100m to its manufacturing facilities, etc because of poor business in its baijiu industry.

I believe the news ahead for KepCorp is likely to be negative.