Keppel Corporation

OCBC on 20 Apr 2012

Keppel Corporation (KEP) reported a 86.4% YoY rise in revenue to S$4.3b and a 141.0% increase in net profit to S$750.8m in 1Q12, such that net profit accounted for 48% and 49% of ours and the street’s full year estimates, respectively. Excluding lumpy contributions from the property arm, 1Q12 net profit was still above our expectations. KEP’s operating margin in the quarter was 22.2%, with O&M turning in EBIT margin of 15.1% vs our expectation of 14%. Meanwhile, enquiries for rigs remain healthy and we expect more newbuilds and upgrading work ahead. Maintain BUY with unchanged S$13.38 fair value estimate.

1Q12 results above expectations
Keppel Corporation (KEP) reported a 86.4% YoY rise in revenue to S$4.3b and a 141.0% increase in net profit to S$750.8m in 1Q12, such that net profit accounted for 48% and 49% of ours and the street’s full year estimates, respectively. The sharp increase in earnings was mainly due to revenue and profit recognition for sales at Reflections under the deferred payment scheme. Should this be excluded, 1Q12 net profit would have accounted for about 32% of our full year estimates, still above our expectations.

O&M margins will depend on amount of repair and upgrade work
KEP’s operating margin in the quarter was 22.2%, with O&M turning in EBIT margin of 15.1% vs our expectation of 14%. Management guided that “normal margins” going forward would be in the 10-12% range as the previous two years were mainly boosted by productivity gains from repeat orders. Still, we believe there is the possibility of the O&M arm delivering 14-15% margins should there be more repair and upgrading work (generally commands higher margins than newbuilds).

Rig market remains buoyant
Management revealed that enquiries for newbuild rigs remain healthy. In Brazil, the group has plans to expand its yard capacity and is looking for more land. Though KEP has been securing orders (including Floatel and Sete LOI, new orders YTD total to S$6.2b), there is still available yard capacity for jack-up and semi-sub deliveries in 2014 and 2015, respectively. We understand that there is still additional room at its Philippines, Indonesia and China yards.

Maintain BUY
We have tweaked our estimates to incorporate a higher operating margin assumption of 20.2% and updated our SOTP valuation to account for revenue recognition of the Keppel Bay project. Although KEP has appreciated by about 6.3% vs Sembcorp Marine’s 1.1% rise since we switched our preference from the latter to the former in end Feb, we still see an upside potential of about 15.8% for KEP (excl. div) to our unchanged fair value estimate of S$13.38. Maintain BUY.