Keppel Corp

Kim Eng on 20 Jul 2012

Bumped up by Reflections earnings. Keppel Corp reported 2Q12 PATMI of SGD520.9m (+35.4% YoY, -30.6% QoQ), beating our quarterly estimates. This was largely due to lumpy sales recognition from its property segment for Reflections at Keppel Bay units sold under the deferred payment scheme. The company also declared an interim dividend of 18 cents per share. We maintain our BUY recommendation and raise our SOTP-based target price to SGD12.90.

One-off performances not expected to repeat. Property division contributed SGD176m in net profit for 2Q12, in which more than 75% was attributed to Reflections. The Investment division recorded a 106% YoY increase in 2Q12 net profit to SGD66m due to gain from sale of listed securities. In addition there was a SGD27.7m writeback of doubtful debt. These items contributed to the higher performances this quarter and are not expected to be repeated in 2H12.

Remain optimistic on O&M margins. We were more watchful of its O&M operating margin, which came in at 13.2% this quarter, a tad lower than our expected range of 14-16%. Management reiterated longterm sustainable margins of 10-12%, but was reluctant to give clear guidance on near-term margins going into 2H12. Instead, it remarked  that it would rather let the market have a pleasant surprise. Based on our orderbook analysis, we remain cautiously optimistic that full-year margins would come in within our 14-16% range expectations.

Robust demand from offshore sector. A tight rig market with rising utilisation rates and an aging rig profile would continue to support the rig-building business. Demand for FPSOs is also expected to grow as more oil fields move towards development stage. Keppel has secured about SGD7.7b in new contracts YTD (including LOIs) and looks to be on track to meet our full-year forecast of SGD11.0b in contract wins. Room for more upside. We adjust our forecasts for higher property and investment income. Net profit for FY12F is raised by 5%. Our SOTP-based valuation is also higher at SGD12.90. Maintain BUY.