Keppel Corporation Ltd - Still in the game in Brazil (CIMB)

S$10.86 Target: S$13.80

Mkt.Cap: S$19,347m/US$15,689m

Conglomerate

S$140m shipbuilding contracts from Brazil

Keppel has secured S$140m shipbuilding contracts for its new Brazilian yard for six 45-tonne bollard pull harbour tugboats from Brazilian customer (REBRAS) and a 4,500dwt PSV from Keppel O&M's ship-owning subsidiary, Guanabara Navegacao Ltda. The winning of these smaller contracts does not mean that Keppel is withdrawing from Petrobras drillship bids as its new yard is slated for OSVs with the flexibility to support major rig/drillship projects undertaken by its Keppel BrasFELS yard in Angra dos Reis. This is also the first speculative PSV newbuild for Keppel which endorses our view of strength in the global OSV market, especially in Brazil. YTD order wins are estimated at S$6.76bn or 80% of our S$8.5bn target for 2011. No change in our earnings estimates, though we have lowered our target price to S$13.80 (from S$14.00), still based on sum-of-the-parts valuation to incorporate a recent downgrade in our target price for Keppel Land. Stock catalysts are still expected from stronger-than-expected new orders, margins and upside from Petrobras wins.

The news

Keppel has secured S$140m shipbuilding contracts for its new 7.6ha yard in the state of Santa Catarina, Brazil. The new yard which specialises in offshore supply vessels (OSV) is expected to commence operations in 1Q12. The contracts entail the building of a series of six 45-tonne bollard pull harbour tugboats for REBRAS and a large 4,500dwt Platform Supply Vessel (PSV) for Keppel O&M's Brazilian ship-owning subsidiary, Guanabara Navegacao Ltda, in anticipation of demand in Brazil. Deliveries are scheduled for 4Q12 to 2013.

Comments

S$6.76bn order wins YTD. Excluding the Guanabara PSV contract (estimated at about S$80m) the tugboat contracts (about S$60m) should lift Keppel’s YTD new orders to S$6.76bn, or 80% of our S$8.5bn target for 2011. We estimate Keppel has another 10 unexercised rig orders worth around S$2.8bn.

Smaller contracts do not mean withdrawal of drillship bids. The winning of these smaller contracts does not mean that Keppel is withdrawing from Petrobras drillship bids. Its new yard at Santa Catarina is slated for OSVs with the capability to fabricate offshore steel structures and support major rig/drillship projects undertaken by its Keppel BrasFELS yard in Angra dos Reis.

OSV market has bottomed out; Petrobras to spur growth. We believe the global OSV market has bottomed out after being in the doldrums for close to two years as a result of a huge influx of newbuilds and the global financial crisis. Since early 2011, global OSV operators have been noting a steady increase in new contracts and utilisation although day rates are still stagnant. Petrobras’s need for over 100 Brazilian-built OSVs by 2020 to facilitate the E&P of the Santos Basin’s deepwater pre-salt fields should also fuel more OSV orders over the next few years.

PSVs in vogue. The Guanabara PSV is the first speculative newbuild for Keppel’s new ship-owning division, endorsing our view on the strength of the OSV market. Unlike AHTS, the lack of rampant speculative building during the 2006-08 boom has somewhat sheltered the PSV segment from oversupply. There are more than 2,000 AHTS in the global fleet currently vs. some 700 PSVs.

Valuation and recommendation

Maintain Outperform as order momentum continues. Catalysts are expected from stronger-than-expected new orders, margins and upside from Petrobras wins. No change in our earnings estimates, though we have lowered our target price to S$13.80 from S$14.00, still based on sum-of-the-parts valuation to incorporate a recent downgrade in our target price for Keppel Land.