Event
Keppel Corp’s 3Q11 net profit came in strongly at $406.1m, up 33.3% versus 3Q10. This was ahead of our and market expectations. The offshore and marine (O&M) division is still the star performer, with margins improving further. While the market may be concerned about future orders for O&M, Keppel continues to strongly execute and capitalise on what it has in hand. Maintain BUY with the target price raised to $12.60.
Our View
The O&M division achieved revenue growth of 23.6% QoQ and EBIT growth of 33% YoY, with margins rising from 24% to 26%. Keppel’s margin improvement continues to be driven by higher efficiencies and better pricing on more recent orders. We expect margins to continue to trend upwards and probably plateau at around 28%.
While Keppel Land is expected to record a gain of $492.7m from the divestment of Ocean Financial Centre to K-REIT, the impact on Keppel Corp at the group level is neutral due to eliminations from both these companies in its stable.
Year-to-date, the O&M division has secured new orders worth some US$7b and its current orderbook stands at around US$7.2b. Management contends that the outlook remains good, with enquiry levels high, despite the current uncertain economic outlook. This reinforces our positive view on the long-term demand for offshore assets.
We also remain optimistic about Keppel’s prospects in Brazil. However, we have yet to factor this into our earnings in view of the uncertainty surrounding the timing of the award of contracts.
Action & Recommendation
We raise our earnings forecasts by 6.5% for FY11 and 5% for FY12. While cash flow has turned negative due to higher working capital requirements, management does not see this as an impediment to its dividend payout potential. Our FY11F yield stands at 4.1%. Our SOTP-based target price is raised to $12.60 from $11.88 on the back of the upward earnings revisions.
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