CIMB-GK Securities: Keppel Corporation - 1 Feb 2008

Bumper Dividend

• Below expectations. 4Q07 core net profit of S$268.0m (up 52% yoy) was 25% below our expectations and 9% below consensus. The shortfall could be blamed on lower-than-expected profit from Offshore & Marine (O&M) due to losses from a completed Petrobras project (P-52) on rising labour costs. Full-year core profit of S$1.03bn (up 38% yoy), however, was within our estimate of S$1.09bn. 4Q07 revenue rose 38% to S$3.4bn from stronger order-book recognition from O&M and Infrastructure.

• O&M has strong earnings visibility but margins to moderate. Net order book was S$12.2bn (up 16% yoy) with S$7.4bn of new orders secured in 2007 and deliveries stretching till 2011, reinforcing our view that the O&M outlook remains strong. However, we expect jack-up rig orders to moderate in 2008 and be replaced by deepwater drilling units and production-related equipment and conversions. We have conservatively assumed S$5bn of order wins for 2008. In view of the margin pressure from a tight labour market and accelerating costs, we have lowered our margin assumptions for O&M for FY08-09.

• Dividend windfall. Keppel’s share price could receive a boost from a generous dividend of S$0.55/share, comprising a final dividend of S$0.10/share, capital distribution of S$0.25/share and a 40th anniversary special dividend of S$0.20/share. Total payout for the year is $0.64/share, translating into a yield of 5.6%.

• Reducing earnings estimates. We have cut our earnings estimates by 9.7% and 7.6% for FY08-09 to reflect further cost pressure in O&M and slower growth in Infrastructure for FY08. We also introduce FY10 estimates.

• Maintain Outperform; but target price cut to S$13.70 from S$17.90, still based on sum-of-the-parts valuation. Our target reduction follows our earnings downgrade and lower fair values for its listed subsidiaries due to the recent decline in share prices. We have also lowered our ascribed CY09 P/E for Offshore & Marine and Infrastructure to 18x and 12x (from 22x and 15x) respectively given risk aversion in the current market. We continue to like Keppel for its strong order book with predictable earnings that could buffer the risk of a global recession.