Keppel Corp - Buy: 1Q09 Net Profit Beat Expectations

1Q09 PATMI 28% of CIRA FY estimate — Keppel reported 1Q09 PATMI of S$285mn, beating our and street expectations of ~S$240mn, on the back of healthy O&M margin expansion YoY and higher contribution from Infrastructure division but offset by weaker results from KepLand and SPC. Net cash of S$174mn and ROE of 22.4% are comforting, but FCF turned negative due to higher working capital and capex. Mgmt is “hopeful” of EPS growth for FY09.

O&M updates — Execution remains solid with 1Q09 EBIT margin improving to 10.4% – the highest since 1Q06 and above mgmt's guided range of 8-10%. However, mgmt concedes order enquiries have declined with no new rig orders since 3Q08, as potential customers face financing challenges. We identify Skeie Drilling (~12% of KEP’s order book) as one of its higher risk customers, but this could be mitigated by Skeie’s recent restructuring plans and KEP’s policy of remaining +FCF for its projects.

Infrastructure boost? – 1Q09 revenue included maiden contribution from Doha North project and better performance by Keppel Merlimau cogen power plant, thereby accounting for larger share (10%) of group profits in 1Q09 vs. 5% in 1Q08. Recent new project wins and synergies in developing townships with KepLand should propel the division to be a more significant profit contributor.

Maintain Buy – We maintain our current estimates but acknowledge there are upside risks given 1Q09 results. Keppel is currently trading at 9.6x FY09E P/E, with FY09E ROE of 21.5%. At current levels, the market is valuing the O&M business at 8.5x FY09E P/E. Maintain Buy/Low Risk.

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