Published October 25, 2008

Keppel down on outlook concerns

By VINCENT WEE

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KEPPEL Corp's Q3 results briefing sought to assure investors that at least one of its three pillars of growth remains strong, with continued strong topline numbers contributed by the offshore and marine division.

Executive chairman Lim Chee Onn emphasised that 'a slowdown in rig orders over the next 12-15 months should not have too significant an impact on us as Keppel O&M has about $13 billion in orders stretching up to 2012'.

But investors remained worried, selling off the stock during the course of the day after it rose a little in the morning on initial relief at the better-than-expected results. Keppel shares closed 25 cents lower at $3.75 yesterday.

Chief among concerns was the outlook ahead. Revenue and profit recognition for the offshore and marine division (O&M) in Q3 came from the earlier still-buoyant market. But costs increased 21 per cent from the preceding quarter from $2.4 billion to $2.9 billion although revenue kept pace and rose 23 per cent from $2.6 billion to $3.2 billion in the corresponding period. These costs were mainly due to expansion of work at the O&M division.

Keppel management explained that the business remained secure despite the uncertainties ahead and further deterioration in global economies. 'We believe that the fundamentals underpinning rig and FPSO demand are still intact, although in the foreseeable future, some rig owners' ability to expand their fleet could be constrained by tight credit,' said Mr Lim.

'We do not expect this situation to have a significant impact on full-year financial performance,' said group finance director Teo Soon Hoe. The group would make more stringent assessments of investments but will also seize opportunities, he added.

'Keppel O&M will deliver its performance and results in 2008,' said senior executive director Choo Chiau Beng. While deferring to the oil companies to make newbuild decisions, he said that he believed rigs are still viable at an oil price anywhere above US$50 per barrel.

DMG analyst Serene Lim noted in a report released yesterday that operating margins remain intact despite a rise in staff costs and operating expenses. 'Although we noted a considerable jump in staff costs and/or operating expenses, the improvement in margin on a year-on-year comparison (up 180 basis points) could possibly be due to a marked improvement in its execution of projects and/or a shift towards higher-margin product mix (more ship repairs and conversion projects, higher percentage towards projects with owner-furnished equipment) over the past year,' she said.

DMG maintained a neutral rating on Keppel but cut its target price to $4.52 on a reduction in FY08-09 earnings by 2-6 per cent.