Keppel Corporation

OCBC on 20 Jul 2012

Keppel Corporation (KEP) reported a 52.2% YoY rise in revenue to S$3.5b and a 35.4% increase in net profit to S$520.9m in 2Q12, such that 1H12 net profit accounted for 78% and 80% of ours and the street’s full year estimates, respectively. Lumpy earnings from the property division boosted net profit, and this is not expected to recur in 2H12. Operating margin in the O&M division continued to normalize to about 12% in the quarter, in line with management’s guidance. Meanwhile the group’s net order book stands at S$7.6b, with deliveries extending to 2015. KEP remains optimistic about the return of semi-submersible orders, given the tight supply of deepwater rigs. We fine-tune our estimates and update the market values of KEP’s listed entities, such that our fair value estimate eases slightly from S$13.38 to S$13.34. In line with our expectations, an interim dividend of S$0.18 has been declared. Maintain BUY.

Another set of strong results
Keppel Corporation (KEP) reported a 52.2% YoY rise in revenue to S$3.5b and a 35.4% increase in net profit to S$520.9m in 2Q12, such that 1H12 net profit accounted for 78% and 80% of ours and the street’s full year estimates, respectively. Lumpy earnings from the property division boosted net profit, mainly due to earnings recognition from homes sold under the deferred payment scheme at Reflections at Keppel Bay. However operating margin slipped from 20.1% in 2Q11 to 18.8% in 2Q12 as margins in the offshore marine division continue to normalize.

O&M margins normalize to low teens
Operating margin in the O&M division has more than halved from 24.2% in 2Q11 to 12.0% in 2Q12 as margins continue to normalize. Recall that margins were impressive around the 20+% range from 4Q10 to 4Q11 as high profit margin contracts secured largely before the crisis were executed, along with productivity gains. This trend is within our expectations as management had earlier guided that a normalized level would be around 10-12%.

Earnings momentum will not continue into 2H12
Management has stressed that the good showing in 1H12 is exceptional and will not be repeated in 2H12, as earnings were largely supported by one-time profits from the property division. We understand that contribution from Reflections accounted for more than three quarters of the property arm’s net profit in 1H12.

Maintain BUY
The group’s net order book stands at S$7.6b, with deliveries extending to 2015. KEP remains optimistic about the return of semi-submersible orders, given the tight supply of deepwater rigs. Meanwhile management also shared that the earliest delivery for a jack-up order placed today is Sep 2014. We fine-tune our estimates and update the market values of KEP’s listed entities, such that our fair value estimate eases slightly from S$13.38 to S$13.34. In line with our expectations, an interim dividend of S$0.18 has been declared. Maintain BUY.