Keppel Corporation: Steady execution in 2Q11 (OCBC)

2Q11 results largely in line. Keppel Corporation (Keppel) reported a 3.7% YoY fall in revenue to S$2.3b but saw a 9.3% rise in net profit to S$384.9m in 2Q11. Results were largely in line with our expectations, though the change in accounting method for projects in the property segment has made earnings more "lumpy", such that 2Q11 net profit was 5% lower than our forecast. Revenue and net profit from the offshore and marine division in 1H11 accounted for 47% and 52% of our full year estimate, respectively (operating margin of 22.4% in 1H11 was higher than our assumption of 20% for FY11F; and we understand that several rig repair jobs in 2Q11 had boosted margins). This division remained the largest contributor to total net profit with a 68% share.

Updates on the infrastructure and property segments. Revenue from the infrastructure division increased by 20% to S$1.4b in 1H11. The expansion of the Keppel Merlimau cogen plant from 500MW to 1300MW is "progressing well" and on schedule for completion by 2013. Meanwhile, Keppel Integrated Engineering has entered into a JV to build, own and operate a water reclamation plant in Tianjin Eco-City. As for the property segment, revenue was flat with the adoption of the new accounting standards (elaboration below). According to management, though property cooling measures have reduced transaction volumes in China, demand for the group's township homes remain firm. Interest in Ocean Financial Centre and Marina Bay Financial Centre in Singapore remains healthy as well.

Proprietary design a choice rig for drillers. The offshore and marine division has secured S$7.4b of new orders YTD, such that net order book now stands at S$9.1b with deliveries extending into 2014. The bulk of the new orders are for high-spec jackups, including a total of 13 orders in 1H11 for the group's proprietary KFELS B Class design which is "now setting the standard for the industry", according to management. Yard slots are tight, and a new jackup ordered today can be delivered earliest only in late 2013 or early 2014.

Maintain BUY. The group has declared an interim dividend of S$0.17/share. We have updated the market values of Keppel's listed entities, and with the lowering of Keppel Land's fair value estimate to S$4.65 by our property analyst, our fair value estimate for Keppel Corporation falls to S$12.92 (prev. S$13.00). However, the stock remains as one of our preferred picks for the sector. Maintain BUY.