Keppel - Upgrading O&M new orders and SOTP modifications

In line with our more positive view on O&M, we have increased our earnings estimates for KEP by between 3% and 10% for the next three years and raised our target price from S$7.10 to S$9.40. We consider KEP well-positioned in O&M and its recent strength in Infrastructure has been a pleasant surprise. Buy.

We believe the recent rise in oil prices and recovery in confidence may lead to a resumption in E&P spending, which had previously been put on hold. We view KEP as well-positioned to benefit from Petrobras’ significant investment plans, in our view. Credit markets should ease over time, and when they do, we expect offshore-related new orders to return. We firmly believe that accelerating global reserve decline rates will prompt industry capex to continue growing.

We raised our 2009E-2011E new order assumptions from S$1.5bn, S$2.0bn, and S$3.0bn to S$1.7bn, S$2.5bn, and S$3.7bn. Our target multiple for O&M has been raised from 12x to 15x, which we believe is justified considering our expectation of the resumption of new orders, KEP’s strong branding and positioning, and the study of a more direct play SMM, which saw its PERs punching comfortably past 16x when new orders increased from about S$1bn in end-03 to S$2bn in end-04.

Maintain Buy; long-term prospects remain healthy and intact. Our SOTP-based TP is S$9.40 (target multiple of 15x FY09E earnings for O&M; market value for bulk of other components). Key risks: greater-than-expected US$ depreciation, unexpected cost increases, and contracts execution.

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