Published January 13, 2009

Shipyards, rig builders fall on news of order cancellations

Analysts warn 2009 may be bleak for Keppel, Cosco and SembMarine

By VINCENT WEE

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THE market did not like it and neither did analysts when Keppel Corp chose to announce late last Friday night that its units had lost some of the contracts it had warned were under review.

Keppel said on Friday that it has lost two of the three contracts it said were under review in November.

Likewise, the shares of rival rig builder Sembcorp Marine and Cosco Corp (Singapore) were also hit after they also announced order cancellations or payment deferments.

Keppel yesterday closed 44 cents or 8.9 per cent lower at $4.48, SembMarine lost 23 cents or 12.5 per cent to close at $1.61, while Cosco fell six cents to end the day at 81.5 cents.

Keppel said on Friday that it has lost two of the three contracts it said were under review in November, SembMarine said that its PPL Shipyard unit and Seadrill have agreed to revised terms on a two-jack-up-rig contract signed in June 2008 and Cosco lost half of an order for four bulk carriers.

None of the news was unexpected. Nonetheless, it was concrete proof of investors' fears.

'The cancellations totalled US$455.4 million, of which 22 per cent would have been recognised in FY09, 38 per cent in FY10 and the remainder in FY11. This would reduce our FY09's and FY10's revenue forecasts by 1.5 per cent and 2.4 per cent, as well as our FY09's and FY10's net profit estimates by 1.6 per cent and 2.6 per cent, respectively,' said DMG and Partners analyst Serene Lim in a research report released yesterday.

'We had expected Scorpion Offshore to cancel the semi-sub contract with Keppel, but not Seadrill given that no formal announcement was made by SembMarine earlier. We also received verbal confirmation from SembMarine that the Seadrill contracts were intact. Therefore, we had deduced that Keppel's similar jack-up orders with Seadrill would remain unchanged,' said CIMB-GK Research.

Both houses kept their neutral and underperform ratings and $4.53 and $4.20 price targets respectively, but on the revised payment terms, DMG warned that 'we think the revised terms are not in Keppel's favour, indicating a shift in bargaining power from yard owners to rig owners'.

'We believe Keppel would be taking on asset pricing risk. This will be a concern if the values of jack-ups fall significantly. We also think it may set precedent and trigger more contracts to be renegotiated on similar terms,' Ms Lim added.

She also cautioned that 'Singapore yards, including Keppel, may continue to face potential cancellations from highly-geared rig owners that have difficulty to finance out of future operating cashflows. Owners building semi-submersibles on speculative intent are most at risk. With six semi-submersibles constructed at Keppel's yard, three of which are not built on the back of period hire contracts, Ensco International is one such example'.

On Cosco, Macquarie Research reckons about $600 million of revenue has been affected by various order cancellations and deferrals. It further warns: 'That the affected orders were all won in mid-2007 is all the more alarming given that orders placed in 2008 would be less expensive to cancel for Cosco's clients. We expect further cancellations and/or deferrals through the remainder of 2009.'