Keppel Corporation: 3Q11 results slightly above expectations (OCBC)

3Q11 net profit slightly above expectations. Keppel Corporation (Keppel) reported an 18.1% YoY rise in revenue to S$2.7b and a 33.3% increase in net profit to S$406.1m in 3Q11, such that 9M11 figures accounted for 74% and 78% of our full year estimates, respectively. Results were also better than the street's expectations. Operating margin in the O&M segment was strong at 26.0% in 3Q11 compared to 19.0% in 3Q10. At the pre-tax level, the O&M division saw a 10% increase in net profit to S$1.06b in 9M11, while infrastructure registered a 42% rise to S$108m due to better performance from Keppel Energy. However, the property division reported a 21% fall in pre-tax profit to S$334m with lower share of profit from associated companies.

Not affected by turmoil in the financial markets. According to management, enquiries for new rigs continue to be healthy and the level remains the same compared to three months ago. The group also has not felt the impact of a credit crunch, as customers so far have not exhibited any difficulties in making milestone payments. Despite the uncertainty in the financial markets, fundamentals in the oil and gas industry remain sound due to favourable demand and supply dynamics. However, if the situation in Europe deteriorates and drags down sentiment further, oil prices could dip to US$60-70bbl over the short term, slowing new order flows.

Backed by strong order book. Keppel O&M has secured S$8.7b worth of orders YTD, topping our new order estimate for the year. The net order book stood at S$9b as at 30 Sep 2011 with deliveries extending into 2014. The group still has three outstanding rig options, all of which will expire by the end of this year. Management revealed that they all belong to rig operators, and we estimate the combined value of these options to be around S$2b.

Sees good prospects for deepwater solutions; maintain BUY. Keppel is optimistic with regards to the demand for its deepwater solutions with the projected increase in capital expenditure for the next few years. Drilling in the North Sea has also been revitalized by new major oil finds, and the Gulf of Mexico is seeing a return to normalcy with more permits being issued. Meanwhile, as we roll over our valuation to FY12F earnings and update the market value of the group's listed entities, our fair value estimate slips from S$12.12 to S$12.02. Maintain BUY.