Keppel - SPC gain pared back by impairments

Keppel Corp posted 2Q09 net earnings of S$739.5m, which included an exceptional gain of S$422.2m. Excluding this, earnings for the quarter was $317.3m, which was a 6% increase over 2Q08. Sequentially, earnings grew by 11%. Offshore and Marine contributed 74% of operating earnings, and even managed to improve its EBITDA margin by a further 1.6% QoQ, through improved operating efficiencies.

Although Keppel reaped a S$660m gain on the sale of SPC, its overall exceptional gain amounted to S$421.5m. The SPC gain was offset by losses on disposal of investments of around S$46.0m, as well as impairment of assets worth S$189.1m, the lion’s share of which were recorded in the infrastructure division.

We understand that the infrastructure impairment was taken on its Singapore operations, and presumably on its 500MW power plant on Jurong Island, where lower electricity tariffs are yielding return on assets that are below expectations – hence the impairment. The broader division saw a 7% sequential drop in sales to S$587.9m, while EBITDA fell from S$45.6m to $31.9m.

Also disappointing was that Keppel did not declare any special dividend despite the extraordinary gain. However, interim dividend rose to 15cts per share from 14cts in 1H08, in line with core earnings improvement. Keppel may consider a larger payout at year-end. For now, it rather retain cash for potential M&As, and to offset the cash outflow of converting O&M deposits to sales, with very few new orders to replenish this cash.

We are adjusting our FY09 forecast down by 4% to account for impairments and lower infrastructure earnings, while raising O&M on higher margins. We are also cutting our FY10 and FY11 forecasts by 5% and 9% respectively – barring new order flows, O&M will go through most of its current orderbook of S$7.7bn within the next 4 quarters, and 3-yr core earnings CAGR stands at -14% p.a to 2011. Our Sum of the Parts value of S$7.77 remains unchanged. We are still factoring a special dividend of 20 cts per share at year-end, and together with a 15cts interim and a further final 15cts ordinary, FY09 yield forecast stands at 6.4%.

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Keppel Corp - Sailing faster to the edge

Keppel Corp announced its 2Q FY09 results on 23 July after the market closed. Excluding the gain on the sale of SPC, the company’s 2Q FY09 recurring net profit rose by 6.2% YoY on the back of a 21.2% YoY increase in revenue.

The 2Q FY09 results were above our estimates, with key surprises being the revenue for the Offshore & Marine (O&M) and Property segments. We have raised our FY09 net-earnings forecast by 10.6%. Our FY10 and FY11 net-profit forecasts are unchanged and are still the lowest among the Bloomberg- consensus forecasts.

The company now has S$7.7bn in the O&M orderbook through to FY12. To put this into perspective, the O&M segment has 310 days of orderbook, based on its 2Q FY09 pace of revenue and contract wins. In other words, we think a significant O&M revenue deceleration through to FY11 is imminent, unless the company starts winning numerous, high-value contracts in 2H FY09.

We have a six-month sum-of-the-parts-based target price of S$5.44, which reflects our cautiousness towards the rig-building sector. We would not be surprised if Keppel Corp’s share price continued to rise if equity indices globally continued to rise. However, we feel investors should avoid the stock of a company that has such potential to disappointment in its FY10-11 earnings. We maintain our 4 (Underperform) rating.

Keppel Corporation - Market More Likely to Focus on EPS Beat than Cash Flow

We think the market will focus on the EPS beat: Keppel’s 2Q09 clean EPS beat our estimate by 22%, primarily due to O&M margins coming in 2% higher. Management highlighted efficiency gains in deepwater projects. This sounds like a permanent advantage.

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.

Keppel - Another strong quarter - results beat estimates

2Q09 results ahead of expectations. Keppel Corp (Keppel) reported 2Q09 PATMI of S$740m. Excluding one-off gains (detailed below), core PATMI was S$318m, the highest PATMI ever recorded in a quarter and ahead of ours and consensus’ estimates. Overall, 2Q09 revenue of S$3.2b surpassed our expectation due to better-than-expected contributions from O&M and Property.

Core operating profit was S$351m. Another bright note was O&M’s improved operating profit margin of 11.1%, reflecting margin sustainability despite weak macro environment. An interim dividend of 15S¢ was declared. No special dividend was proposed despite the gain from the favourable sale of Keppel’s entire stake of SPC to PetroChina as Keppel conserves cash for possible M&As. Thus, we think some investors may be disappointed. Nevertheless, we surmise this is a good set of results and Keppel remains well positioned to ride on secular growth trends in all the core businesses. We have raised our FY09F PATMI by 9% to account for better margins. Our revised target price is S$8.82 (from S$8.60 previously). Maintain BUY.

Financial snapshot. 2Q09 revenue of S$3.2b was up 21% YoY, 8% QoQ, with stronger-than-expected contributions from O&M (buoyed by several successful deliveries) and Property (boosted by strong residential sales). This higher revenue and improved O&M execution capability led to core operating profit of S$351m (+26% YoY, +12% QoQ), exceeding our estimate. Hence, the Group’s operating profit margin expanded from 9.9% in 2Q08 to 11.3% in 2Q09. O&M’s margin edged up to 11.1%, giving us comfort on O&M’s execution capability. Infrastructure’s margin was 4%.

One-off net gain of S$422m included Keppel’s gain of S$614m from its sale of SPC to PetroChina, impairment losses arising from Infrastructure assets of S$189m and operations restructuring cost of S$4m.

Tweak our FY09F estimates, TP raised to S$8.82, Maintain BUY. We have raised the EBIT margins for O&M by 10bp, but lowered the EBIT margins for Property by 50bp for FY09F. Hence, our FY09F net profit estimate is raised by 9%. No change has been made to FY10F earning. Our target price is revised to S$8.82 (from S$8.60 previously). At our target price, Keppel is trading at 9.3x FY09F P/E and 2.6x FY09F P/B against ROE of 27.6%.

Keppel Corporation: Mind the gap

Exceeded expectations. Keppel Corporation (KepCorp) posted 2Q results that beat our expectations with topline growing to S$3.2b (+21% YoY, +7.5% QoQ) translating to a PATMI of S$739.5m (+147% YoY, +159% QoQ). However, excluding exceptional items, PATMI grew at a more moderate pace to S$317m (+6% YoY, +11% QoQ). The stronger results were due to more aggressive accretion of its orderbook as well as better operating efficiencies at its yards in building repeat rig units for its customers.

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.

Keppel - SPC to boost full year earnings

Keppel Corp will be posting 1H09 results on the 23rd of July. Earnings will be boosted by an exceptional gain of S$660m from the divestment of its 45.6% stake in SPC to Petrochina for S$1.47bn in June. The gain works out to 41 cts per Keppel share. The gain may result in a distribution to shareholders. Our expectation is that Keppel will pay out about half of the gain to shareholders (20 cts) at 1H09, while retaining the remainder for further investments, primarily in infrastructure, and township projects in China.

We do not see an immediate need for Keppel to invest in further expansion for its Offshore and Marine division. While the yard is currently operating close to full capacity from contracts that it has secured over the past two years, new order flows have been muted over the past year. Keppel’s last reported orderbook was S$9.5bn. We expect the yard to have converted around S$2bn in revenue over 2Q09, in line with 1Q09.

For its 70% owned Reflections at Keppel Bay project, Keppel had previously sold 633 units at an average price of around S$1,880 psf. Reflections has 496 units remaining, which were unsold over the past year as the property market cooled off. With the revival in interest in the property market, we believe that Keppel and Keppel Land will take the opportunity to re-launch its remaining units. We estimate that achievable prices would be in the region of S$1,800 to S$1,900 psf, which would generate additional net revenue of S$1.1bn for Keppel.

We are not yet factoring additional Reflections sales revenue stream into our FY09 forecast, which stands at S$1.57bn. (S$913.1 net of gain from SPC sale). The loss of associate earnings from the divestment of SPC is also expected to be muted and in the region of just S$80m for FY09, as SPC was facing thinner refining margins from lower crude prices.

However, we are factoring in an average selling price of S$1,800 psf for the remaining 496 units at Reflections into our Sum-of-the-Parts asset valuation, while adjusting for the SPC stake sale. Our SOTP valuation now stands at S$7.77 per share, and we are accordingly raising our recommendation to a Hold, pending Keppel’s 1H09 reporting. Assuming a 20cts interim dividend payout, FY09 yield stands at 6.9%.

Keppel Corp - Outlook excites

Keppel remains our top pick in the O&M sector. We believe SPC’s divestment has not only benefited Keppel materially, but also created other new opportunities: (1) becoming PetroChina’s preferred yard and (2) entering into joint collaborations to acquire upstream assets or build midstream/downstream (gas) infrastructure. Furthermore, we think the cash proceeds will strengthen Keppel’s balance sheet and allow it to explore M&A interests, particularly for expansion of Brazilian presence, integration of O&M expertise with upstream assets and pursuit of new infrastructure ventures. The strategic significance and outlook appears exciting, in our view. As such, we reiterate our BUY call on Keppel with a target price of S$8.60, based on sum-of-the-parts valuation.

SPC’s sale brings future benefits. We think the divestment of Keppel’s SPC stake to PetroChina represents a win-win partnership for both parties. For one, Petrochina could utilise Keppel’s shipyard when it expands and/or upgrades its offshore facilities for deepwater exploration and production purposes. In addition, we expect more synergistic activities to occur in the medium to long term, such as joint collaborations to secure potential upstream assets. In addition, we think Keppel could leverage on PetroChina’s extensive platform to build up the former’s infrastructure/energy/utilities business in China, given PetroChina’s dominance in China’s gas transmission network.

Entrenching Brazilian presence with possible yard expansion. Upstream reported last week that Brazilian construction group WTorre and Keppel were closing in on an agreement that would give Keppel a 70% stake in the Estaleiro Rio Grande (ERG) yard in southern Brazil. As the ERG facility was initially established by Petrobras, we believe its acquisition would bolster Keppel-WTorre’s bid to clinch Petrobras’ tender for the hull construction of eight floating production, storage offloading (FPSO) vessels.

Value creation in the Upstream business? As SPC’s Chairman and Keppel’s current CEO, Mr Choo Chiau Beng spearheaded SPC’s maiden venture into the upstream oil and gas business in 2000. Given the business’s steady stream of revenue, we do not rule out Keppel acquiring new upstream assets. We also see potential synergies with Keppel’s rig building capabilities, as well as strong relationships with international drillers and oil field operators.

Keppel buy with SPC’s divestment

We upgrade Keppel to a BUY, with a price target of S$8.57 (from S$7.92), based on our sum-of-the-parts valuation (SOTP — method unchanged). We have adjusted our FY09F earnings to account for the exceptional gain of S$660mn to be booked in 2Q09, given the deal completion timing.

Excluding the exceptional gain, FY09-11F earnings have been adjusted downward to take away SPC earnings previously incorporated into our forecasts. We also have adjusted our FY09F, FY10F and FY11F infrastructure division earnings upward significantly to S$123mn, S$134.8mn and S$147.5mn, respectively, to account for the 1Q09 earnings, where EBIT margin doubled to 6% from 3% in 1Q08. As mentioned earlier, infrastructure EBIT earnings grew 177% to S$37mn in 1Q09, on the back of improved performance and new contributions from the various units.

Our price target of S$8.57 is pegged at a 5% discount to our SOTP value of S$9.03 (method unchanged). We value the O&M division using a DCF over a 20-year period. This incorporates a cyclical downturn in earnings from FY11F, and a WACC of 7.5% (in line with our WACC valuation for Sembcorp Marine). The group’s other businesses are valued at the current market price levels. We incorporate the divestment price of S$6.25 per share for Keppel’s 45.51% stake in SPC into our SOTP valuation. As for Keppel Land, we have incorporated Keppel’s maintained stake in a larger capitalised entity (based on KepLand’s latest market price and increased share base) following the property subsidiary’s recently completed rights issue.

With our price target implying a more than 23% potential upside, we rate Keppel Corp a BUY. FY10-11F PE of 13.0x and 12.9x each have moved up substantially from the lower end of Keppel’s historical PE band range of 8x and 18x for FY10F and FY11F, respectively. But, we believe the restructuring of the group’s businesses and how the group deploys funds from the SPC sale will be a key catalyst for the stock. Potential strategic investments, either in its offshore & marine or infrastructure division, or M&A acquisition opportunities, and a recovering property market being less of a drag on valuations are also positives, in our view.

If we strip out the group’s property and infrastructure and other divisions, Keppel’s offshore & marine business is trading at FY09F PE and FY10F PE of 8.8x and 10.8x, respectively. The group ROE of 17% looks reasonably attractive for a conglomerate, although we note the downtrend. The forward dividend yield at 4.6% is attractive relative to SCI’s 3.8% yield, with the group likely to maintain its track record of paying 50-60% of earnings as dividends.

Keppel Corp - SKDP avoids bankruptcy, but delays rig deliveries

According to Bloomberg, Skeie Drillling & Production ASA (SKDP) has avoided bankruptcy after bondholders agreed to a plan to rescue the company. Bondholders agreed to excuse 1.2b kroner (US$186m) in debt, the company will get 860m kroner (US$133m) in new equity and Keppel FELS will postpone the delivery of SKDP's three rigs under construction.

The total contract value of the three rig contracts is US$1.16b (S$1.78b).

We spoke to Keppel's management earlier. The company has collected 30-45% in payment. This implies S$1.1b still outstanding or 12% of existing orderbook of S$9.5b. The 30-45% payment collection is lower than our earlier estimate of 50% because the delivery dates of the rigs had been pushed back (no longer 1Q10, 3Q10 and 4Q10 respectively as per original company announcements).

We estimate the rig completion is 20%. With the latest news on SKDP, it would appear the delivery dates could possibly be postponed again. We will contact management for more details before lowering our earnings forecasts.

Maintain SELL on Keppel as share price is significantly above our target price of S$5.90. Our key concern remains the low contract wins of S$300m ytd. Orderbook will decline rapidly. Investors are far too optimistic on the recovery of E&P equipment orders amid the recent rally in oil price. Equipment orderflow typically lags oil price rally by 2 years.

KEPPEL CORP - Restructuring II Begins .....

Exactly one month after its new CEO declared there were no sacred cows: that operations where we were unlikely to extract significantly more value will be sold, Keppel Corp (Kep C) has agreed to sell its entire 45.51% stake in Singapore Petroleum (SPC) to PetroChina for S$1.47 bln (Rmb 6.93 bln) or $6.25 per share. (Choo Chiau Beng, CCB succeeded Lim Chee Onn as CEO at the start of the year.)

Assuming the deal is completed by the deadline July 24th (PetroChina to secure approvals from Chinese regulators), PetroChina will launch a mandatory conditional offer for the remaining shares at the same price, conditional on it getting more than 50% of SPC.

PetroChina advised by Deutsche Bank, said in its statement it intends to use SPC as the “platform for the implementation of its international strategy and to provide a broader foundation and stable path for development”. In addition, PetroChina said it intends to maintain the listing status of SPC.

China’s state owned companies have been on a shopping spree for overseas assets, especially in the commodities arena.

Kep C had sold 125 mln SPC shares to the Indonesian group called Satya Capital at $1.50 each in 2003; but had between 2005 and Apr’07 bought back almost 50 mln shares at as high as $5.77 each. Satya on the other hand, had fully divested its SPC shares by Jun ’07, with the last 115 mln shares sold at $5.32each.


The Offeror is wholly-owned by PetroChina Company (PCL) which is listed in Hong Kong, Shanghai and New York. PCL is one of the largest oil and gas companies in the world. State-owned China National Petroleum Corporation (CNPC) is the parent company of PCL.

1. Although we had earlier thought the SPC was the least “un-sacred” among the assets likely to be divested by Kep C, and the offer price being some 29% off its 2007 peak (when oil was at US$145 per barrel), the divestment (probably the easiest to execute) is a pleasant surprise nonetheless and will likely be well received by investors.

2. We upgraded Kep C to a BUY since CCB hinted of Restructuring II, despite Kep C then encountering some “technical resistance” at the $6 level.

3. Divestment plans reminded us of Kep C’s Restructuring I exercise in the aftermath of the Asian Crisis, when the divestment of Keppel Bank led to the privatization of Keppel Fels, which had by then absorbed Hitachi Zosen, Keppel Shipyard, to form the formidable Keppel Offshore & Marine, a leader in the offshore sector that it is today.

Possible bankruptcy of Keppel FELS Customer

Skeie Drilling & Production ASA is currently constructing 3 large N-Class Jack-Up offshore drilling rigs suited for operations on the Norwegian Continental Shelf at Keppel FELS shipyard in Singapore.

On 17 April 2009, SKDP annouced a re-structuring proposal. On 4 June, a USD 40m miltstone payment on Rig 3 is due, and SKDP will not be able to make this payment as the amount is.

SKPD believes a bankruptcy filing is detrimental to both shreholder and bondholder values.

The construction of the three harsh environment jack-up rigs at Keppel FELS Shipyard in Singapore is progressing according to schedule according to http://www.skeiedrilling.com/.

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.

Keppel selling SPC stake - Generous offer by Petrochina

Acquisition by Petrochina. Keppel announced yesterday that it had entered into an agreement to sell its entire 45.51% stake in SPC to Petrochina for S$6.25 per share, or US$1.47bn in cash.

Generous offer. The offer price is at 24% premium to Friday’s closing price and implies 15.7x 2009 PE and 11.6x 2010 PE, and 1.8x and 1.7x P/Bv, respectively. The offer price is generous and valuations are significantly higher than regional peers’ average of less than 10x PE for 2009-10 and 1.1-1.2x P/BV. But for Petrochina, the price tag implies EV/refining capacity of US$16,000/bpd including SPC’s distribution network and E&P assets, which is still lower than the estimated refinery replacement cost of US$20,000/bpd.

Upgrade to Buy with target price of S$6.25. The share sale should trigger a tender offer. In our view, the offer price is attractive and we recommend investors accept the offer. With this tender offer, SPC’s share should rise to S$6.25, which implies 24% upside.

Keppel Corporation: Another contract cancelled

S$181m worth of order was cancelled. Keppel Corp (KEP) announced that GSP Titan Ltd has terminated the newbuild order for a multi-purpose heavylift/pipelay vessel due to its inability to secure funding. As KEP has already received sufficient cash receipts from GSP to cover both the costs and expected loss of profit, we believe that no write off of previously recognized profits is required.

Three contracts cancelled since Jul 08. The cancellation of the GSP contract brings total cancellations to three for KEP, including one each from Scorpion Offshore and MPU Offshore. The combined cancelled amount is S$1.1b. Note that the contract (worth S$69m) with Lewek Shipping is also in the final phase of negotiation for eventual cancellation.

Order cancellation risk is reducing, but has not disappeared. The cancelled GSP contract is in line with our argument that while order cancellation risk is expected to reduce going forward, it is premature to argue that this risk has disappeared completely.

Maintain FULLY VALUED on KEP. We are keeping our forecasts intact, as we have imputed order cancellations of S$1.1bn, excluding the contracts that were cancelled last year. Our fair value is adjusted to S$4.41; due to our cut in Keppel Land's fair value to S$2.08 pre-rights. Maintain FULLY VALUED on KEP, as the implied FY10F PE for its O&M is expensive at 18x, close to its peak cycle PE for rig building.

Keppel Land's rights issue: win-win situation for Keppel Corp

S$712 million Keppel Land rights issue; Keppel Corp may have stake raised upto 72.63%: Keppel Land announced a fully underwritten 9-for-10 rights issue of 653.6 million new shares at S$1.09 each. Keppel Corp has (a) provided an irrevocable undertaking to subscribe in full for its pro-rata entitlement ‘plus’ (b) entered into sub-underwriting agreement to subscribe up to 90% of unsubscribed portion effectively guaranteeing to subscribe up to 95% of Keppel Land rights issue. Keppel Corp will provide funding of S$373 million (under Scenario 1 i.e. only point a) or maximum of S$678 million (under Scenario 2 i.e. (a) + (b)) of the rights issue. Under Scenario 2, Keppel Corp’s stake in Keppel Land will rise to 72.6% from current 52.6%.

Funding overhang on property segment abated for now; deal largely NEUTRAL to Keppel Corp shareholders: While one of our concerns on Keppel Corp remained the ‘conglomerate structure’ in current environment especially given the funding needs of its property subsidiary, we believe the current deal is a win-win situation for Keppel Corp. Given the steep discount of rights price, either (a) existing shareholders of Keppel Land take up their pro-rata share of the rights issue i.e. lessening cash outflow from Keppel Corp or (b) Keppel Corp takes up its entire commitment which would be less dilutive to it. However post-transaction Keppel Corp would move from net cash position (incl. deposits) of S$174 mn to net debt of S$199 / S$504 mn.

Keppel Corp: minimal valuation impact; EPS neutral in Scenario 1, 0.5- 1.5% EPS accretive in Scenario 2. Based on our calculations, in Scenario 1, we estimate our SOTP would be down 1.6% to S$5.66 while in Scenario 2, SOTP would be down 1% to S$5.69. While this may seem counter- intuitive (especially for Scenario 2 given the steep discount of rights price), this is based on our property team's revised Dec-09 PT on Keppel Land of S$1.25 (on post rights basis, see note published on April 24). Our sensitivity analysis suggests it would have been valuation neutral for Keppel Corp assuming Keppel Land’s valuation goes up to S$1.44 / S$1.35 (for Scenario 1/ Scenario 2).

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.

K-Reit Asia: Cloudy outlook

K-reits results were in line with expectations, with the effect of positive rental reversions offset by declining occupancy, as weak demand for office space amid rising supply dragged on rental rates and DPU performance. Office concerns have been well documented and share price appears to have largely factored in a deteriorating operating environment. While valuation is inexpensive at implied NPI yield of 6.8% and DPU yield of 12.4%, near term catalyst is lacking. Maintain HOLD with TP of $0.80.

1Q09 results in line. Kreit reported a 29% yoy rise in revenue to $14.8m, lifted by positive rental reversions vs a year ago. NPI and distribution income improved 19% and 38% yoy to $10.8m and $15.7m respectively, as the impact of higher property taxes was offset by reduced interest expense following its rights issue. However, quarterly operating performance was eroded by c9% as higher portfolio rents (+5.9% qoq to $8.06psf vs $7.61 psf in 4Q08) was offset by lower occupation of 95.8%. Both Bugis Junction and Prudential Tower saw take up moderating to 88-92%, and higher costs.

Challenging times. Looking ahead, Kreit's strategy is to retain tenants and manage cost efficiently amid difficult market conditions. While its portfolio seems fairly resilient with a long WALE of 5.5 yrs and 28% of its leases on LT structures, maintaining occupancy would remain challenging with new supply coming in over the next 2-3 years. Our assumptions of a 15% vacancy and 50% peak/trough rental declines till 2010/11 translate to an average DPU decline of 3% pa.

No near term visibility. At the current share price, valuation for Kreit is inexpensive with implied NPI yield of 6.8%. However, give the ongoing sector headwinds, we are hard put to find near-term re-rating catalyst and maintain our Hold call with a TP of 0.80.

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.

Keppel - Secured UK infrastructure contract

Awarded to build one of largest waste and renewable energy projects in the UK. Keppel Seghers, the environmental technology division of Keppel Integrated Engineering Limited, has secured an Engineering, Procurement and Construction contract worth GBP 233m (or S$518m) to build an Energy-from-Waste Combined Heat and Power Plant (EFW CHP) to serve the Greater Manchester region in the UK. This EFW CHP plant, expected to be completed in 2012, will boost a capacity to treat up to 420,000 tonnes per year of solid recovered fuel and supply 270,000 MWh of electricity and 500,000 tonnes of steam per year when operating at full capacity.

Deal clinched from Municipal client. The EFW CHP plant is part of a Private Finance Initiative (PFI) waste management project by the Greater Manchester Waste Disposal Authority. We believe this award is positive for Keppel as it opens doors to securing more contracts from Municipal clients (ie. local government/authorities). We see opportunities in Europe as there are currently more than 20 PFI waste management contracts up for tender. Though the current economic downturn may have affected the progress of these highly capital-intensive projects in the short term, we note that the UK government has announced the provision of up to GBP3b of funding for waste PFI contracts that are facing financing difficulties. Securing this contract also signifies the UK government’s acknowledgement of Keppel Seghers’ technological strength, especially in meeting stringent EU environment targets.

Raising TP to S$5.24 (from S$4.55 previously), but recommendation stays at NEUTRAL. We estimate that this contract would only contribute to Keppel’s revenue from FY10 onwards. Thus, we have raised our FY10’s topline by 1% and bottomline by 0.6%. Our recommendation stays at Neutral, with a revision to our target price to S$5.24 (from S$4.55 previously), following adjustments to our sum-of-the-parts valuation:
1. 2.5x P/B FY10 valuation for KOM.
2. DMG’s target prices of S$1.80 for Keppel Land and S$2.95 for SPC
3. 11x P/E FY10 valuation for Infrastructure
4. Market values for Keppel’s listed entities (closing prices as of 9 Apr 09).

Keppel - Secures 3 orders worth S$300m

Keppel Corp’s Offshore & Marine (O&M) division has announced three contracts worth a total of about S$300m. The first two projects from, repeat customers, are for the construction of a derrick lay barge and the modification of a Floating Production Storage and Offloading (FPSO) vessel. The third project is awarded by a new customer, for the completion of a semisubmersible.

Built for repeat customer Bumi Armada, the derrick lay barge will have the capability for operations in waters of up to 100m in depth, for deployment in the Caspian Sea. Keppel will build two separate hull strips which will be joined at a shipyard in the Caspian Sea. The parts are expected to be delivered by November 2009.

The second project is from Single Buoy Moorings for the modification of FPSO Capixaba, which was originally a conversion carried out by Keppel in 2006. The new work scope includes the installation of four new modules and the integration plus modification of the existing topsides and turret, before being re-deployed in Brazil in early 2010.

Finally, its Brazil yard, has secured a contract from Noble Drilling for the completion of an ultra-deepwater semi drilling rig. The rig is a dynamically-positioned (DP2) unit designed to operate in water depths up to 10,000 feet, with a drilling depth of up to 35,000 feet. The scope of work to be performed is mainly for mechanical completion. The rig will be chartered to Petrobras after completion in 4Q09.

No significant contribution is expected from these jobs in the current financial year, and the quantum of the contracts is within our scope of order win expectations in FY10. The contracts also do not signify any recovery in the offshore market, as two of the three jobs are refurbishments and fitting, while the third is a very specialized vessel. Our outlook for Keppel therefore remains unchanged, with O&M earnings expected to taper off from 2011 onwards, in lieu of a recovery in the oil rig market. We maintain our Sell recommendation to a SOTP target price of S$3.75.