Keppel Corporation (POEMS)

Hold (Maintained) Closing Price S$7.47

Target Price S$8.50(+13.8%)

• Secures US$199 mil jackup rig order from Safin Gulf FZCO.

• Lowering our expectations on future rig order wins.

• Maintain Hold with fair value lowered to $8.50.

Another B class in the bag

Keppel Corp announced last evening that it has secured a US$199 mil. order for a KFELS B Class jack up rig from Safin Gulf FZCO. The rig is scheduled for delivery in 3Q2012 and will be a refurbishment and upgrade of a KFELS B class rig that Keppel FELS purchased earlier in the year. We also understand from Keppel that the rig was purchased from an undisclosed party in the secondary market earlier this year. The buyer, Safin Gulf FZCO is part of privately owned Safin GmbH which is among the 10 largest independent steel trading and distribution companies in the world. This will be the first rig to be owned by Safin Gulf FZCO.

Lowering our expectations

While we are encouraged by the order win, we note that the pace of new rig orders have slowed significantly since 1H2011.We believe that this is due to the current economic uncertainty as well as the growing number of rig orders in the pipeline (for delivery by end 2013/early 2014) which has resulted in a more cautious ordering stance among drilling operators and speculators. We also think that there is a high chance that this rig order win was secured mainly due to its early delivery date of 3Q2012 versus late 2013/early 2014 for new rigs being ordered now. Therefore, we cannot take this order win as a good indication that sentiments are still as upbeat.

Perhaps another indication of the current sentiment among buyers will be the rate of exercise of rig options granted to buyers earlier on. We learn from the company that it now has five options outstanding after some expired recently. We estimate that four options were expired and they were likely from Discovery Offshore (2 options), Asia Offshore Drilling (1 option) and Dynamic Offshore (1 option). The expiry of these options lends further support that sentiments have indeed weakened.

Maintain Hold with fair value of $8.50

Keppel Corp share price has fallen 38% since our last report, in tandem with weak market conditions. Although we lower our expectations on future rig order wins due to the worsening macroeconomic conditions, we believe that this might already been amply reflected in Keppel’s share price performance and unless the macroeconomic situation deteriorates further, lower prices should not be warranted. We also think that Keppel’s strong orderbook and good dividend yield (approx. 5%) will provide support to its share price at current levels. Thus, we maintain our HOLD recommendation with a lower fair value of S$8.50.At our target price of S$8.50, Keppel will be trading at approximately 12x FY12e EPS, in-line with its historical average valuation.