Keppel Corporation: Recognition of O& M ’s order book to decelerate

Faster than expected draw down of orderbook in 1Q09. KEP reported a net profit of S$285.3m (+ 9% y-o-y) for 1Q09, forming c. 30% of our full year estimate, on revenue of S$2,978.0m (+35% y-o-y). The Offshore & Marine (O&M) division contributed the lion's share of group earnings (+38% y-o-y), which offsets a 33% y-o-y dip in net profit from the property division. While O&M margins rose to 10.4% (+0.6ppt y-o-y), management declined to commit if it is sustainable going forward, but pointed out that the cost of steel and cables have declined.

Order book draw down should decelerate through the year. Net O&M order book as of end 1Q09 stood at c. S$9.5b, with deliveries up to 2012. We believe that the rate of order book draw down is unsustainable, and expect it to decelerate going forward, resulting in a net order book of c. S$6.9b by end FY09. If current rate of draw down persists, we estimate remaining orders to be less than S$5b by year-end. Y-t-d, KEP has won S$315m of orders vs. our full year new order win assumption of S$3b.

Petrobras expected to award contracts. While management revealed that O&M enquiry levels are down, recent media reports that Petrobras is preparing to issue tenders for up to 8 FPSOs and 7 drillships worth US$15bn "as early as May" bode well for KEP, given its long working relationship with Petrobras.

Keppel Land rights issue. Keppel Land (KPLD) announced a 9-for-10 renounceable rights issue this morning to raise gross proceeds of c. S$712.3m. As KEP is partially underwriting this exercise, its minimum commitment would be c. S$373m(based on 53% stake). KEP's cash balance stood at S$2.1b at end 1Q09, with net cash of S$174.2m.

Maintain FULLY VALUED on KEP. We maintain our FULLY VALUED rating and TP for KEP at S$4.45. At current share price, KEP's implied FY10 PE for its O&M Division is lofty, at close to the peak cycle PE of 18-20x for offshore rig builders. Investors should also be reminded that ex-dividend date for KEP's final dividend of 21.0 Scts is 28 April 2009.

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