Keppel Corporation (POEMS)

Buy (Upgrade)

Closing Price S$8.42

Target Price S$9.86 (+17.1%)

• We see good chance of winning Petrobras tender.

• Secures US$245mil. jackup rig order from Ensco plc.

• Upgrade to Buy from Hold with fair value raised to $9.86.

What has changed?

Upstream reported last week that Petrobras received bids for the charter of 21 ultra-deepwater rigs from Ocean Rig and Sete Brasil. It is understood that Keppel is bidding with a semisubmersible design, which will be built at BrasFELS existing yard in Angra dos Reis.

We believe that Keppel stands a high chance of securing some of contracts given the sheer size of the award and that it is separately bidding in three out of seven tenders.

Secures jackup order from Ensco

Keppel recently announced that it has won a contract to build an enhanced KFELS Super A class harsh environment jackup rig from Ensco plc. The contract arose from the exercise of an option that was part of Ensco’s order of two KFELS Super A Class rigs on 10 February 2011. The rig is scheduled for delivery in 3Q2014.

We note that the contract value of this rig is approx. 10% higher than the previous order of KFELS Super A Class rigs in February (also from Ensco). While this might be mainly due to escalation clauses (higher equipment, material costs and strengthening USD/SGD exchange rates), the willingness to exercise this option at higher prices sends a positive signal about the market in our view.

Upgrade to Buy with fair value of $9.86

We upgrade Keppel Corp to Buy from Hold with a revised target price of $9.86 to take into account potential Petrobras win. At our target price of S$9.86, Keppel will be trading at approximately 13.5x FY12e EPS. This is 1.5 times higher than its historical valuation of 12 times FY12e EPS, which we think is justified given that Keppel stands a good chance of being awarded some Petrobras contracts. Keppel’s strong orderbook and good dividend yield should also limit any downside at current levels.