Though we wonder how readily it can be realized outside Singapore, which is where we expect a rising share of incremental newbuild work to be done. Still there is upside to our base case EPS. We have 10% O&M operating margins in 2010 (high end of guidance) falling to 9% by 2012, driven by rising competition from Korean yards. Each 1% increase in the O&M margin over this forecast period increases group EPS by 7%.
Rather than the negative free cash flow: Keppel reported a headline FCF of $S1.1 bn, bolstered by SPC sale proceeds. Underlying FCF remains negative, as customer prepayments are worked down. This is happening faster than we thought (we had negative FCF only as of 2010). We need to check this further. Keppel would not commit to extraordinary shareholder payouts beyond the 7% increase in the interim dividend. It did indicate that M&A was possible, without being specific.
Confident on positioning in Brazil: We see Keppel as best positioned to win new tenders from Petrobras (PBR) in 2H09. This drove our June upgrade. The company confirmed the importance of local content in the tenders. It sounded confident about its own chances, given its track record with PBR and physical presence with the largest O&M yard in Brazil.
We keep Keppel second behind top pick Sembcorp Industries, whose valuation is more supportive we think (ex-Marine stub on 8.6x PE, vs. 12.3x average). We see scope for the SCI utilities business to surprise Aug 6th.
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