Keppel Corp

Kim Eng on 10 Oct 2012

Not concerned with a weaker quarter. Keppel Corp will report 3Q12 results after market close on 18 Oct 2012. We expect PATMI to come in at SGD317m, a decline of 22% YoY due mainly to lower Offshore & Marine (O&M) segment margins and weaker by 39% QoQ due to absence of large and lumpy property recognition for Reflections at Keppel Bay. We are generally not concerned with the expected weaker 3Q12. Maintain BUY with target price raised marginally to SGD13.30.

Pricing power returning to rigbuilders. We are confident that robust offshore activities would lead to a continual flow of orders for the rigbuilders. Keppel would stand to benefit from a newbuilding cycle which should last for another 2 years at least.  We may even see some margin expansion for new contracts as pricing power shifts to the yards due to tightness in yard slot availability. A rig order placed today could only be delivered in late 2014. 

Order win expectations should be met. Keppel has secured about SGD8.9b in O&M orders YTD against our forecast of SGD11.0b for the full year. We think that there is a high chance for Keppel to meet our forecast. Contract win expectations have been priced into our valuation and further order wins, unless significant, is unlikely to incite any further upgrades in our target price.  O&M margins bear watching but should have bottomed.

Operating margins for the O&M segment would remain the key concern. Following a downward trend since 3Q11, we believe that operating margin has bottomed at 13.2% in 2Q12. We expect this to turn up higher for the next two quarters to achieve an overall 14.6% for the full year. Essentially, O&M sector need to achieve average operating margins of about 15% in 2H12 to meet our expectations. In our view, a miss in margins this quarter would more likely reflect a timing issue rather than a structural underperformance. If so, we would see as an opportunity to accumulate further. Maintain BUY, TP raised to SGD13.30 as we update valuations for our SOTP components.