Keppel Corp (KimEng)

Event:

Keppel Corp remains one of our prime picks, particularly with its recent share price weakness. Its fundamentals and earnings have remained intact, despite its disproportionate 8% slide in the past three weeks versus the Straits Times Index’s 4% decline. Orders for the offshore and marine division (O&M) are set to grow further, while potential concerns over property have been overplayed. With an implied 43% upside to our target price of $15.30, Keppel is a screaming BUY at this level.

Our View:

Keppel’s O&M division currently has an estimated orderbook of some US$7.3b lasting till 2014. While new orders have been muted vis-à-vis previous quarters (US$3.9b in 1Q11), the division has still managed to secure some US$1.75m worth of new orders since April. This comprises some seven jackups and additional orders for a semisubmersible drilling tender and an accommodation semisubmersible.

While we have not yet seen firm orders for deepwater rigs such as semisubmersibles and drillships, we understand that enquiry levels remain high, with Keppel continuing to quote

firm prices. According to ODS-Petrodata, day-rates for mid-water depth semisubmersibles were up in the last month, while utilisation levels are starting to pick up as well. We believe it is a matter of time before this translates to new orders, especially with oil prices remaining firm at around US$114 per barrel.

The replacement cycle and the demand for a new generation of deepwater rigs, akin to what has already been driving orders for the jackup market, are likely to be replicated in the deepwater segment.

The share price of 53%-held subsidiary Keppel Land has also taken a beating, declining by 46 cents, or 11%, in the past three weeks on concerns over its exposure to China. This translates to imputed erosion in Keppel’s SOTP by just 21 cents. We continue to like Keppel Land for its diversified business mix and our target price stands at $5.90 (10% premium to RNAV).

Action & Recommendation:

Our earnings forecasts and positive outlook for Keppel Corp remain very much intact. Our SOTP-based target price is maintained at $15.30. Reiterate BUY.