Keppel Corporation (POEMS)

Hold (Maintained)

Closing Price S$10.30

Target Price S$12.16(+18.06%)

• Secures US$195mil. jack up order from Transocean

• Secures S$146 mil. FPSO-related jobs

• Maintain Hold with fair value unchanged at $12.16.

Another B class Secured

Keppel Corp announced last Friday evening that it has secured a US$195 mil. order to build the KFELS Super B Class Bigfoot jack up rig for Transocean. The order came from the exercise of one of the three options that was granted to Transocean on 17 February 2011.The rig is scheduled for delivery in 3Q2013.

The KFELS Super B Class Bigfoot rig is designed with larger spud cans to enable the unit to operate efficiently while minimizing potential leg penetration problems in soft soil conditions. The rig will be equipped with a 1.5 million pound drilling system and will have a maximum cantilever load of 3,200 kips. In addition, the rig will be capable of drilling at 75 feet outreach, allowing for coverage of a larger well pattern.

Keppel also recently announced that it has secured two offshore contracts worth S$146 mil. The first contract was awarded by Single Buoy Moorings Inc for the conversion of a VLCC into an FPSO with completion in 2Q013.The second contract was awarded by Rubicon Offshore for the fabrication and integration of an external thrust mooring system for an existing FPSO with completion in 4Q11.

The above contract wins have lifted Keppel Corp’s year-to-date orderbook and order wins to approx. S$9.5 bil and S$7.8 bil respectively. We also estimate that Keppel Corp now has 9 options left that is worth approx. S$2.6 bil.

Maintain Hold with fair value unchanged at $12.16

Keppel Corp share price has fallen 4.8% since our last report, in tandem with weak market conditions. As a result, its current share price now represents an 18% upside potential to our target price and within our band range of a BUY rating. However, we are keeping our Hold rating on Keppel Corp due to a substantial fall in oil prices (approx.13%) since our last report, which will have an impact on market sentiments. We also do not think that oil prices will be able to recover to above US$100/bbl level (WTI cushing) in the short run given the current market turmoil. Thus, we maintain our HOLD recommendation with an unchanged fair value of S$12.16.

SMRT Corporation Ltd- Disappointment from the fare review (POEMS)

Hold (Maintained)

Closing Price S$1.795

Target Price S$2.06 (+14.8%)

• Lower than expected fare adjustment

• Travel Demand Management Schemes to lower rail revenue for SMRT

• Revised earnings estimates down by 2-3% for FY12/13E

• Maintain Hold with revised target price of S$2.06

Fare adjustment of +1.0% is below our expectations of +2.0%

The transport operators applied for the maximum allowable increase of 2.8% in average fares, but the Public Transport Council (PTC) only approved an increase of 1.0% after considering various factors. This increase is also below our expectations of a 2.0% increase.

Travel Demand Management Schemes to cost SMRT S$5mn

Apart from the smaller than expected increase in average fares, SMRT also embarked on a “Travel Demand Management Scheme” that is expected to cost them S$5mn. SMRT will offer a bigger discount of 30cents (vs 10cents previously) to incentivize commuters to travel outside of the peak travel hours. Success of these schemes would result in lower rail revenue for SMRT.

Lower than expected revenue growth insufficient to offset higher operating expenses

Operating costs had been on the rise due to higher energy and staff expenses and we expect these cost pressures to intensify following the full opening of Circle Line (CCL) in October. This would likely reduce profitability of the Rail and Bus even further.

Valuation

We used a blended valuation model of DCF (COE: 7.2%, terminal g: 1%) and P/E (18.0X FY12e PATMI) to arrive at our target price of S$2.06 and expect a total return of 19.6% after incorporating a dividend yield of 4.7%. While SMRT’s expected total return exceeds our threshold of 15%, we expect the market to focus on the decline in earnings and disappointment from the fare review in the near term. Hence, we stay neutral and maintain our Hold recommendation on SMRT.

KSH Holdings Ltd - Plumper margins despite slower revenue recognition (OCBC)

Maintain HOLD

Previous Rating: HOLD

Current Price: S$0.23

Fair Value: S$0.30

PATMI down 38% due to slower revenue recognition: KSH Holdings (KSH) reported PATMI of S$2.6m (EPS of 0.75 Scents) in their first quarter of the financial year ending 31 Mar 2012. This was down 38% compared to 1Q11 when they reported a PATMI of S$4.2. Revenue also fell 44% from S$71.0m a year ago to S$39.4m this quarter. We saw revenues fall mainly due to the lack of contributions from projects completing before and during 1Q12 which decreased the top-line by S$50.5m, partially offset to the tune of S$18.9m by projects that commenced after 1Q11 and those that progressed into more advanced stages of construction. We note that operating margins has improved to 10.2% in 1Q12 compared to 7.1% in 1Q11 due to more profitable projects and a project nearing completion this quarter - the Education Resource Center project from NUS. Overall, 1Q12 revenue form 18% of our FY12 estimate and were somewhat below expectations due to slower-than-expected revenue recognition from the order book. We adjust our FY12 forecast down to reflect this but are not unduly worried since we expect the pace to pick up later.

Eight Courtyards to start construction in Dec 11. We estimate the order book to be at S$350m currently after the recent contract awarded for the construction of Eight Courtyards, a 99-year condominium project located at Yishun Ave 2 and Canberra Drive. The contract was awarded by Yishun Gold Pte Ltd, a joint venture company between Fraser Centrepoint and Far East Organization. Construction is slated to take place between Dec 11 and May 14 and, with no projects nearing completion in the next two quarters, we expect the pace of construction revenues in this quarter to set the pace for the remainder of 2011.

Scrip dividend scheme approved. KSH also recently announced that it would apply the Limited Scrip Dividend Scheme to the final tax exempt one-tier dividend of 1.0 S-cent for the last financial year at a price of S$0.245 per share, whereby shareholders may elect to receive their dividends in cash or KSH shares.

Maintain HOLD at 30 cents. We continue to see significant value in KSH but remain cautious due to macro-economic uncertainties and a possible inflection point in private construction demand from slowing private residential trends. When these clouds clear and more clarity is available for project sales, especially for Cityscape@Farrer Park, we could see a significant re-rating of the share price. We update assumptions in our model and maintain a HOLD rating on KSH with a revised fair value estimate of 30 cents versus 31 cents previously.