There's Worse To Come For Singapore's Rigbuilders

THE world's two largest rigbuilders' third-quarter earnings may have been enough of a fright for investors already - but analysts have warned that the fourth quarter could be even gloomier for Keppel Corp and Sembcorp Marine.

Investors should still brace themselves for more potential provisions and impairments, and should expect contract wins to be few and far between for the next few years, analysts said, though they added that stock valuations already appear to be near their troughs, and earnings may also be close to the bottom by this juncture.

They also noted that since Keppel has a more diversified revenue stream than SembMarine, the conglomerate's earnings are likely to be more resilient amid the prolonged downturn than its smaller rival's.



Both Keppel and SembMarine have announced job cuts numbering in the thousands and weaker third-quarter results amid an industry-wide downturn due to a slump in crude oil prices. For the three months ended September, Keppel remained profitable overall but SembMarine plunged into the red.

Keppel earlier this month posted a 38 per cent drop in third-quarter net profit to S$225 million from a year ago and said that its rigbuilding arm Keppel Offshore & Marine (Keppel O&M) has in the three months to September cut its direct workforce by about 3,080, bringing layoffs over the first nine months of the year to nearly 8,000 or just over a quarter of its workforce. Of the 3,080 axed, 660 were in Singapore. Keppel also made an impairment of fixed assets of S$34.5 million for the period.

As for SembMarine, it last week booked a S$21.8 million net loss for the quarter, compared with a S$32.1 million profit a year ago, and said it had axed 8,000 jobs "throughout 2015 till to date". A spokesman declined to disclose how many of those 8,000 jobs were cut in the three months to September. The group also made a provision for its stake in Cosco Corp but said its provisions in FY15 for rig orders were still adequate.

Analysts said the industry outlook remains tough as rig orders have dried up and the two rigbuilders might still need to make further provisions, but added it would be difficult to quantify those potential provisions.

"We are still wary of potential impairment for contagious jackup rigs, but management sounded confident that provisions made in 2015 are adequate," CIMB analyst Lim Siew Khee wrote in an Oct 25 note.

But she told The Business Times in an email that the potential provisions for each company would depend on "what their own assumptions would be". "For Keppel, if they mothball more yards, there might be some provisions. For SembMarine, if (their) Brazilian yard does not turn around or execute any work, then impairment risk is there."

KGI Fraser analyst Joel Ng also said it was hard to calculate how much more provisions the two might make, "due to the lack of market transactions that can help indicate the values of the assets sitting on the company's balance sheets".

"Furthermore, it really depends on the company's auditors on how they work with the companies to value the assets based on their internal estimates (usually some form of discounted cash flow valuation given the lack of market values)."

Analysts added that orders may start flowing back only after the next one or two years at least.

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