Dividends: Better than usual but worse than expected. We earlier warned of the unlikelihood of any special dividend from its SPC divestment where cash conservation was called for in view of its majority stake negotiation for a Brazilian yard (WTorres) and the need to provide its own working capital for about four Jackups from Seadrill and Skeie Drilling in its O&M division. Management also alluded to opportunities in the environmental, property and water sectors that the group could capitalise on by having sufficient capital on hand. KepCorp eventually declared 15 S cents interim dividend.
Gap in O&M orders. With better clarity on its operating margins and aggression of orderbook recognition (Exhibit 2), we now think that FY09 would turn in a laudable performance despite the difficult macro environment. However, we view the gap in substantial O&M orders for almost 12 months will significantly affect the group from FY10 onwards. KepCorp is presently trading at 9x FY09F PER (includes SPC divestment gains) and jumps back to 15x PER for FY10F. Despite the expected decline in earnings, the market is pricing KepCorp's stock above its FY07/08 trading band, where it experienced record earnings.
Raised estimates but remaining NEUTRAL. We have factored in KepCorp's better operational efficiency at its O&M division as well as a more aggressive recognition of its order book for FY09. We are also assuming that KepCorp wins 3 of the 8 Petrobras FPSOs hull jobs (prev. 2). Consequently, our FY09 and FY10 anticipated order wins are now S$2.5b (prev. S$2b) and S$3.8b (prev. S$3b), respectively. Upgrades by our property analyst for Keppel Land are also slotted into our estimates. Despite positively re-rating our model, we remain in the tepid recovery camp where we model in diminished (but not vanishing) intense cyclical growth risks. Our SOTP valuation is now S$8.20 (prev. S$6.40). Maintain HOLD. Look to accumulate around $7.40.
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