Keppel Corporation - O&M continues to deliver (DBSVickers)

BUY S$8.78 STI : 2,694.01

Price Target : 12-month S$ 10.14 (Prev S$ 10.38)

Reason for Report : Revision of earnings forecasts, TP, introduce FY13 forecasts

Potential Catalyst: Order wins, better than expected margins

DBSV vs Consensus: Above on higher margins

• 3Q11 PATMI of S$406m in line with our expectations, above consensus; 9M11 makes up 75% of our FY11F

• O&M shines while the offshore market continues to firm up

• Maintain BUY, TP lowered to S$10.14

3Q11 in line; O&M shines again. KEP posted 3Q11 recurring PATMI of S$406m (+33% y-o-y) and 9M2011 PATMI of S$1.1bn (+15% y-o-y), forming c. 75% of our FY11 earnings forecast. O&M continues to deliver, with EBIT margins surprising on the upside, at 26% (+7.0ppt y-o-y), offsetting weaker-thanexpected contributions from both the Property and Infrastructure divisions.

Offshore fundamentals firming up. Notwithstanding the fact that several options had lapsed with 3 options remaining, industry fundamentals continue to firm up, with utilisation rates up across all rig classes. While the current uncertain macro environment could lead to a temporary deferment of orders, this is accounted for by our FY12 order wins assumption of S$5.0bn. This is premised on slower but positive global GDP growth. Petrobras orders remain the wild card not captured by our numbers, for which KEP could win orders for up to 6 semisubs, worth a total of US$3.6-4.2bn.

Earnings forecasts intact. We keep our FY11/12F largely intact and introduce FY13F, for which we project a 2% rise in earnings. We have assumed FY13 O&M order wins of S$5.0bn, in line with KEP’s historical average. We expect efficiency gains accumulated over the past few years of deliveries and from many repeat designs will place KEP on firm ground to generate higher EBIT margins of 16%, from 10-12% pre-2009.

Maintain BUY, TP lowered to S$10.14. Our SOTP-based TP for KEP is lowered to S$10.14(base case TP) on reduced valuation for its listed affiliates, partially offset by rolling forward our PE valuation to 13x of FY12F for the O&M and Infrastructure division. In the event macro uncertainties unfold into a recession scenario, our recession TP of $7.42 takes into account reduced contract wins of S$3b and valuation for O/M pegged at 8.7x PE. KEP remains our preferred pick among the large-cap O&M names in Singapore for its healthy order backlog, diversified earnings stream, solid execution track record and market leadership position as the yard of choice for newbuild jackups and semisubs.