SINGAPORE (April 19): CIMB has downgraded Keppel Corp to “reduce”, saying the rig builder is headed into “long drought”, given the drastic drop in O&M revenue due to deferrals, lower power sale in infrastructure, and its share of losses from KrisEnergy. The property business it says, can’t be relied on to cushion the decline.

Keppel’s 1Q16 net profit of $211 million missed the broker’s estimates by 40% and consensus by 31%.

Noting that the rig builder’s 1Q16 offshore and marine (O&M) core profit plunged 58% y-o-y and 44% q-o-q to $95 million, CIMB says the group missed its forecast by 38%. Deferral of rigs from 2016 to 2017/18 – including Ensco 123 (Super A), Clearwater JU, BOT Japan Drilling JU and two unnamed semisubmersibles – was the key culprit for the lower revenue recognised.

CIMB says new deferrals surface almost every quarter and the headwinds faced in the offshore rig market, pressured by oil prices and ample supply, may lead to more deferrals in 2H16. It says Keppel O&M is slated to deliver six JUs in 2016- three to Grupo R, one JU each to Parden Holdings, Perforadora Central and Falcon Energy, and one semi-sub to SOCAR. The JUs are not backed by contract and have been under negotiation for deferral since 2015. The broker see risks of impairment for these contracts.

1Q16 infrastructure net profit of S$14m was also below CIMB’s expectations due to weaker power and gas sale in Singapore. Infrastructure recorded $2.6 million share of associate loss, mainly to reflect weakness in Keppel Cogen Merlimau.

CIMB cuts its FY16-18 EPS by 11-20% as it lowers O&M revenue and profit assumptions for infrastructure and investment. It further warns that the uncertainty in Brazilian’s political scene and oil prices may hamper further negotiation of Sete Brasil’s projects progress and dim hope of a write-back.