Keppel Corp

Macquarie Research on 11 June 2012

Event
We upgrade KEP to Outperform from Neutral without changing our earnings or target price as the stock has fallen 15% since 20th April ’12 (vs an 8% fall in the FSSTI) and is back in the value zone in our view.

Impact
KEP is one of the top 5 rig builders in the world and a key beneficiary post Macondo accident: KEP has bagged 43% of the global Jack-up orders and 33% of the global Semi-sub orders (all Sete Brasil) since 2010. KEP has become the go-to yard for “High-spec” Jack-ups post the Macondo accident with as many as 30 Jack-up orders in past 2.5 years.

Our recent meeting with management indicates robust outlook: We met KEP O&M’s CFO recently and came back positive on the group’s strategy.

Don’t expect change in demand outlook on short term oil price volatility: KEP doesn’t expect oil rig demand to scale back as long as Brent does not fall below US$75/bbl

Looking at Brazil from a long-term investment standpoint: KEP is the only top 5 rig builder in the world with an operational yard in Brazil. Along with a share of Sete Brasil orders, KEP is looking to supply other top contractors from its Brazil yard. The company also recently made an investment in a new yard to supply support vessels in the future.

Looking forward to more orders in Brazil: While KEP expects the contract for the 5 Semi-subs to be signed soon (LOI signed already), it is also one of the shortlisted bidders for the FPSO contracts from Petrobras.

Dayrates and prices are inching higher; New orders on the way: Our pipeline analysis indicates 2 Semi-sub orders could be on their way from SOCAR to KEP in 2H12. Also, the company sees high enquiries on the Jackup side with prices inching towards US$210-220m/rig.

Earnings and target price revision
No revision in earnings and target price. Stock upgraded to Outperform from Neutral due to 25% upside to our target price now.

Price catalyst
12-month price target: S$12.05 based on a Sum of Parts methodology.
Catalyst: Semi-sub orders in 2H12

Action and recommendation
Stock back in value zone; Trading at discount to mean multiples despite being in the midst of a robust rig-building cycle: We believe the O&M rig building cycle will last another 3-5 years of which KEP will be one of the key beneficiaries. After the recent fall, KEP is now trading at 1.9x P/BV vs 5 year mean multiple of 2.3x with robust support in the form of 4.5% 2013E divided yield and 18-20% ROEs.