Keppel Corp (KimEng)

Event

Keppel Corp’s 2Q11 net profit came in at $384.1m, up 9.3% versus 2Q10 and ahead of our expectation. This is despite a downward restatement of property earnings due to new accounting rules. The marine division continued to be the star performer, with margins improving even further and a new record orderbook obtained. Keppel also announced a better-than-expected interim dividend of 17 cents a share (vs a split-adjusted 14.5 cents in 1H11). Maintain BUY with a higher target price of $14.40.

Our View Following a change in accounting rules, Keppel had to restate its earnings mainly on its overseas and Reflections at Keppel Bay projects. It is now obliged to record revenue and earnings on a completion-of-construction method rather than a percentage-of-completion method, as most of the buyers’ payments are deferred. As a result, the group restated its 1Q11 property earnings downwards by around $38m. This is now to be recognised in subsequent years, ie, on completion.

The offshore and marine (O&M) division achieved 10% QoQ revenue growth and 29% YoY EBIT growth, with margins rising from 21% to 24%. While margins will vary due to order mix, and specifically, a higher proportion of offshore repair margins in 2Q, the margin trend continues upwards.

Year-to-date, the O&M division has secured new orders worth some US$5.8b, and its current orderbook stands at around US$7.2b. Management contends that the outlook remains good, with enquiry levels high. We continue to believe that the cycle has some way to go, with an expected pickup in the deepwater segment, as well its prospects in Brazil. Its infrastructure division performed satisfactorily.

Action & Recommendation

We raise our forecasts by 7.5% for FY11 and 18% for FY12. The deferment of profit recognition under the new accounting treatment is easily offset by the O&M division’s strong performance. With the higher forecasts, our SOTP-based target price is increased to $14.40, from $13.86, despite our recent reduction of Keppel Land’s fair value from $5.90 to $5.25. Maintain BUY.