Keppel Corp

Kim Eng on 10 Jul 2012

Watch out for O&M margins. Keppel Corp would report its 2Q12 numbers on 19 July 2012. A key metric to watch would be its Offshore & Marine (O&M) operating margins. In the absence of any lumpy property recognition, we expect 2Q12 net profit of SGD313m. Stock price dipped to SGD9.64 on 4 Jun 2012 on oil price decline but has since regained some lost grounds. We remain positive and maintain our BUY call with target price of SGD12.50.

Normalising trend. O&M margins have been normalising downwards, falling from a high of 26.7% in 4Q10 to 15.1% in 1Q12. Keppel has guided for long-term sustainable margins in the 10-12% range and near-term margins at 12-15%. Our O&M operating margin assumptions are in the 14-16% range over FY12F-14F. We note that new-build rig prices have not been substantially lower than the peak in 2008 which is the premise behind our margin assumptions.

Not affected by short-term oil price volatility. We believe that oil companies take a longer-term view in their budgeting decisions and short-term oil price volatility should not affect capex spending plans. Structural factors remain intact, driven by deeper water exploration, higher spec rig requirements and an aging fleet. Rig demand remains robust and would be confirmed by order flows in the following months.

Maintaining order forecasts. In our view, O&M contract wins, orderbook trends and margins are usually better indicators of Keppel’s future performance. Since its last quarter results release, Keppel has made two contract win announcements, one for a USD560m harsh environment jackup and another for USD70m worth of offshore contracts. Including the USD4.12b Sete Brasil LOIs, Keppel has secured about SGD7.0b in new contracts YTD, against our full-year forecast of SGD11b.

Maintain BUY. We update our valuations with latest market value and target prices of listed entities. Our SOTP-based target price is consequently revised to SGD12.50, which implies 13.4x FY12F PER.