Keppel Corporation

OCBC on 13 Apr 2012

Keppel Corporation (KEP) announced that its offshore and marine arm has signed a letter of intent with Sete Brasil for the design and construction of five additional semisubmersible rigs worth approximately US$4.12b. If exercised, which we think is highly likely, KEP would have secured S$6.2b worth of new orders this year vs last year’s S$9.8b wins. Though the market has been expecting Petrobras to award rigs from its 28-rig tender with KEP as a frontrunner, this announcement adds more certainty to the final award, which may be within two months. Meanwhile, we increase our FY12 new order win estimate to S$10.2b (including Petrobras orders) and update the market values of KEP’s listed entities. As such, our SOTP-based fair value estimate increases to S$13.38 (prev. S$12.27). Maintain BUY.

Secures LOI worth about US$4.12b from Sete Brasil
Keppel Corporation (KEP) announced that its offshore and marine arm has signed a letter of intent with Sete Brasil for the design and construction of five additional semisubmersible rigs based on Keppel’s proprietary DSS 38E design. The total value of the contracts, if and when agreed and executed, is approximately US$4.12b. This translates to about US$824m per unit.

Substantial addition to order book, if LOI is exercised
These five rigs are in addition to the semisubmersible unit that KEP secured from Sete Brasil in Dec last year (recall that the contract price was US$809m), and if turned effective, bring the group’s total new order win this year to S$6.2b (includes Floatel LOI) vs last year’s full year wins of S$9.8b. However, the impact on FY12 earnings is likely to be limited given that the execution period may extend over several years.

Not a surprise, but still a positive development
Sete Brasil’s CEO attributes KEP’s strong track record in the design and construction of deepwater rigs, as well the rigbuilder’s established yard in Brazil for the award of the LOI. Though the market has been expecting Petrobras to award rigs from its 28-rig tender with KEP as a frontrunner, this announcement adds more certainty to the final award, which is important as it will boost KEP’s order book and extend earnings visibility. Hence we expect the stock to react positively to this news.

Reiterate BUY; up fair value estimate to S$13.38
After the LOI announcement, the market will be waiting for more details such as the delivery schedule of each rig, after the contracts are signed. According to Bloomberg, a final agreement may be reached within two months. Meanwhile, the spread between KEP and Sembcorp Marine has been increasing since we switched our preference to the former in late Feb. We increase KEP’s new order win estimate to S$10.2b (including Petrobras orders) for FY12 and update the market values of KEP’s listed entities. As such, our SOTP-based fair value estimate increases to S$13.38 (prev. S$12.27). Maintain BUY.