Keppel Corp

DMG & Partners Research, Dec 12

KEPPEL Corp said its unit, Keppel FELS, is going ahead with the construction of the Can Do drillship without a contract in hand. The drillship is expected to be completed in 2016.

Management has received positive feedback from customers as the drillship is designed for broader capabilities, including performing development and completion drilling.

As Keppel has shown strong risk management in the past, we believe the decision to build ahead of a firm order suggests the company's confidence in its design.

The value of the drillship was not disclosed, but based on recently transacted drillship prices, we estimate that it could be sold for US$720 million to US$800 million.

While the risk is higher due to the build-to-sell model, we are positive on this development as the success of this maiden project could lead to long-term market recognition of its Can Do design.

We expect the sale of the drillship to fall into our FY2014 new order forecast of S$6.5 billion. Keppel won S$6.8 billion in new contracts in FY2013 - within our upgraded forecast of S$7 billion - and we estimate that its net orderbook has reached S$15.7 billion.

We expect strong orders flow in 2014, with potential orders of five jackup options from Transocean (RIGN VX, NR), one option from ENSCO (ESV US, NR), the sale of the drillship, and the floating liquefied natural gas conversion project from Golar LNG (GLNG US, NR).

Maintain "buy" with a target price of S$12.65. We maintain our FY2013-15 EPS estimates as we expect the drillship to make up part of our S$6.5 billion new order forecast for FY2014. We also expect FY2014 margins to stay above management's long-term guidance of 10-12 per cent in view of the large number of Keppel FELS' jackup rigs due to be recognised.

BUY