Keppel Corporation has announced the cancellation of a contract worth S$181m secured in July 2008 for the GSP Titan, a DP3 multi purpose vessel which was to be built for a Romanian customer. The reason cited was the customer’s difficulty in securing project financing in the current tight credit market.

Keppel says that the cancellation will have no material impact on earnings. The milestone payments are also sufficient to cover costs incurred so far as well the expected loss of profit from the cancellation.

While the contract value is comparatively small and Keppel has protected its downside through its payment policy, this latest cancellation continues to highlight the increased risk in the offshore sector. Last week, Sembcorp Marine announced the takeover of a completed rig due to non-payment by the customer. This latest incident reinforces our cautious outlook on the offshore sector. We maintain our Sell recommendation on Keppel, with a target price of S$4.56.