Friday, 11 April 2014

Keppel Corp

Kim Eng on 11 Apr 2014
  • Maintain BUY, SOTP TP of SGD12.48 following announcement of Titan Quanzhou Shipyard management agreement.
  • Service agreement to manage Titan Quanzhou Shipyard in China is for 30 years.
  • Opportunity to tap into closed offshore market in China and addresses issue of rising competition from the Chinese yards.
What’s New
Keppel has signed a management service agreement to manage Titan Quanzhou Shipyard (TQS) in China for 30 years. This is conditional upon the successful debt restructuring of TQS’s distressed parent, Titan Petrochemicals Group (Titan), and the latter’s trading resumption on the Hong Kong Stock Exchange. Strategically located in Quanzhou in Fujian Province, TQS is one of the largest shipyards in China occupying an area of 110ha with 3,600m of coastline. TQS will undertake offshore projects using Keppel’s proprietary designs under Keppel’s supervision.

What’s Our View
We see this as a long-term strategic move by Keppel to tap the closed Chinese offshore market which has been exclusive to state-owned yards, and to populate its proprietary designs in the Chinese market. It also addresses the issue of rising competition from Chinese yards. While concerns were raised on its ability to protect its proprietary rig designs, Keppel assures that measures to protect key design parameters are in place.

Detailed financial aspects of the partnership were not disclosed but we understand that the basic structure will be based on a fee income plus a component of economic sharing. The move is consistent with Keppel’s strategy of “Near Market, Near Customer” and an extension of its recent forays into key markets like Mexico and the Middle East. We do not expect to see any near term impact but it reflects the company’s active approach in responding to market changes and tapping opportunities to secure future growth. Maintain BUY with SOTP-based TP of SGD12.48.

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