Strong O&M margins; property earnings hit by recognition changes. 1H11 net profit of S$696m (+7% YoY) accounted for 51-52% of ours and consensus estimates. Offshore & marine (O&M) margins remain strong as 2Q11 operating margins came in at 24.2% (2Q10:19.7%; 1Q11: 20.7%) but property earnings were negatively affected by the change in accounting recognition. Following the results, we lower our FY11F EPS by 3% and raise our FY12F EPS by 2% due to change in revenue/profit recognition for its property projects. We maintain BUY with a lower SOTP-derived TP of S$13.35. The lower TP is mainly due to revision in TP for Keppel Land from S$5.00 to S$4.53. Keppel also announced an interim dividend of 17cents/share, up from 14.5cents/share in 1H10.
Offshore operating margins came in at 24%. Pre-crisis order book is more profitable than we expected as O&M operating margins continue to be strong at 24% vs. FY09-10 average of 12% and 20% respectively. Management also attributed the strong margins to several rig repair jobs and completion of a rig project taken from a Chinese yard. We believe Keppel is a good position to cherry pick high margin projects as yard order book is sufficiently filled for the next couple of years. Keppel will benefit the most from jobs with pressing timelines.
Record order intake supports our positive view. Keppel has secured S$7.4b new contracts YTD, equivalent to its record annual order in 2007, and net outstanding order book of S$9.1b will keep yard utilisation high for the next two years. In our view, order win could easily top S$9-10b as several jackup options have yet to be exercised. Management shared that one of the jackup options has lapsed and we estimate that there are eight options left worth at least S$2b. Enquiries for jackup rigs have slowed down due to long delivery date (earliest possible 4Q13/1Q14) but enquiries for deepwater and production assets remain high. Petrobras rig tender remains an unclear issue but Keppel is confident of being involved in the project.
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