04:16 PM Flash: Keppel Corp (KPLM.SI): Buy: Still Benefiting from Continued O&M Strength (C)
6 May 2008 - 9 pages
* Repeat order from ENSCO - Keppel has secured a 5th order for an
ultra-deepwater semi-sub rig from long-time customer ENSCO
International. Valued at US$512mn and scheduled for delivery in
2H11, this is in addition to the 9 new jack-ups that have been
delivered to ENSCO. With this order, new orders secured by Keppel
YTD total S$1.4bn.
* Longer delivery, better price - The latest order is valued much
higher than previous similar contracts, and has a longer delivery
schedule (see Figure 3). Barring marginal differences in
specification, the latest order win represents an increase of
US$200mn compared with the first order (in Sep 2005, US$312mn),
thus suggest KepFELS holds bargaining power in this tight market
for deepwater rigs & ability to pass on inflationary cost
pressures to customer.
* Positive commentary from supply chain - Recent 1Q08 results and
upbeat commentary from offshore drillers suggest the O&M up-cycle
is still ongoing, especially in the deepwater segment. We
reiterate that the push to deepwater may result in larger and
lumpier orderflow and yards such as KEP and SMM will benefit from
the increase in demand for such equipment given the
sophistication. New entrants or technically less competent yards
particularly in China that compete on pricing are likely to lose
out.
* New oil discoveries - New oil discoveries in Brazil (e.g. Tupi,
Jupiter, Carioca) and Canada (e.g. Saskatchewan oil sands),
coupled with rising oil prices (US$120/bbl) will intensify E&P
activity in the long term as oil companies race to spud new wells
and begin production, thus prolong the O&M cycle.
See Appendix A-1 for Analyst Certification and important
disclosures.
Buy/Low Risk 1L
Price (06 May 08) S$10.50
Target price S$13.25
Expected share price return 26.2%
Expected dividend yield 3.5%
Expected total return 29.7%
Market Cap S$16,589M
US$12,202M
Investment strategy
We reiterate our Buy/Low Risk (1L) rating on Keppel Corp, with a target price of
S$13.25. We believe Keppel offers investors an undervalued, steady growth
business, with relatively low earnings risk and potential upside from
business/capital restructuring. Specifically, we expect group earnings to grow
21% in 2008, driven mainly by O&M, SPC and Infrastructure. We believe there
is upside potential from the O&M unit, where Keppel appears well positioned to
benefit from a sustained upturn in demand for the construction and upgrade of
offshore rigs, as well as FSO/FPSO conversions. Potential catalysts include
better-than-expected performances in O&M and SPC, and any new
developments in Infrastructure. |
