Keppel Corporation: Another contract cancelled

S$181m worth of order was cancelled. Keppel Corp (KEP) announced that GSP Titan Ltd has terminated the newbuild order for a multi-purpose heavylift/pipelay vessel due to its inability to secure funding. As KEP has already received sufficient cash receipts from GSP to cover both the costs and expected loss of profit, we believe that no write off of previously recognized profits is required.

Three contracts cancelled since Jul 08. The cancellation of the GSP contract brings total cancellations to three for KEP, including one each from Scorpion Offshore and MPU Offshore. The combined cancelled amount is S$1.1b. Note that the contract (worth S$69m) with Lewek Shipping is also in the final phase of negotiation for eventual cancellation.

Order cancellation risk is reducing, but has not disappeared. The cancelled GSP contract is in line with our argument that while order cancellation risk is expected to reduce going forward, it is premature to argue that this risk has disappeared completely.

Maintain FULLY VALUED on KEP. We are keeping our forecasts intact, as we have imputed order cancellations of S$1.1bn, excluding the contracts that were cancelled last year. Our fair value is adjusted to S$4.41; due to our cut in Keppel Land's fair value to S$2.08 pre-rights. Maintain FULLY VALUED on KEP, as the implied FY10F PE for its O&M is expensive at 18x, close to its peak cycle PE for rig building.

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