BNP Paribas: Keppel Corporation - 9 Apr 2008

A steady ship

Keppel Offshore & Marine still powering the group

Keppel O&M’s order book now stands at a record SGD12.2b, with earnings visibility stretching to 2011. We are comfortable with our neworder estimates of SGD6b-6.5b in 2008, taking reference from 2006-07 when orders started coming in from 2Q onward after a quiet 1Q. We expect the enquiry/order mix to gradually shift toward production equipment. We also believe cost concerns are overdone. Steel content in a rig-build contract is 10% compared with up to 20% in shipbuilding, limiting Keppel’s exposure. The type of steel used in rig building is also different from generic steel plates used for shipbuilding and believed to not have appreciated as quickly as the latter. Keppel also tries to procure steel in bulk by amalgamating steel requirements across various contracts. The bottom line is we believe that Keppel O&M’s high single-digit operating margins are defendable. Keppel O&M still accounts for 66% of RNAV and 60% of PATMI.

Infrastructure: more niche than integrated utilities
We now expect that Keppel is less likely to participate in the sale of the two remaining Temasek power-generation companies on the back of Tuas Power’s transacted price and Keppel’s niche focus on environmental engineering and “green” waste-to-energy solutions as opposed to mainstream power generation. We estimate the infrastructure division will provide low- teens contribution as a proportion of group earnings and constitute the defensive utility-type earnings that should reduce Keppel’s overall earnings volatility. The USD1.7b Qatar domestic solid-waste-management facility just came on stream in 4Q07, while the USD1.1b Doha North wastewater-treatment facility is expected to be completed in early 2009.

Current price offers value
Keppel Corp paid out almost 100% of FY07 PATMI to celebrate its 40th anniversary. We expect the payout to normalise at between 50% and 60%. Its implied O&M multiple of 13.2x 2008E P/E compares favourably against its blended P/E of 14.2x, suggesting deeper embedded value at current prices with downside support in its 3.1% dividend yield. Reiterate BUY.

Target Price: $14.12

OCBC Research: Keppel Corporation - 1 Feb 2008

Record Performance

Record year as net profit crossed S$1b mark. Keppel Corporation (Keppel) yesterday posted unprecedented full-year net profit of S$1.03b (+36.6% YoY) buoyed by a surge in revenue to S$10.4b (up 37.2%) for 2007. All business segments performed better, with contributions from the Property division at 218% higher than the previous year, Offshore & Marine (O&M) sector progressed by 16.6% YoY, Investments business unit improved marginally at 10.7% YoY, and Infrastructure division made an impressive turn-around.

Extended earnings visibility with net order book at S$12.2b. The contracts secured by Keppel O&M division tipped the S$7b mark for the second consecutive year in a row, giving rise to a net order book of S$12.2b and extended earnings visibility into 2011. However, we expect Keppel O&M's order momentum to slow down in 2008 based on an expected influx of new rig deliveries, increasing competition from the Chinese yards, and a pile up of backlog orders against the backdrop of full yard capacity. We note the other concern pertaining to margin erosions as a result of cost escalations in raw material, equipment and labour, especially so in the Brazil yard and the weakening of the USD.

Proposed special dividends and capital distribution. Keppel proposed a final dividend of 10 cents per share and a one-off special dividend of 20 cents per share to commemorate Keppel's 40th anniversary. This brings the total dividend for FY07 to 39 cents per share (including interim dividend of 9 cents). It has also announced a capital distribution of 25 cents per share, giving rise to the final sum of 64 cents per share representing almost 100% payout and 5.6% yield.

Infrastructure business starting to take off. Keppel Integrated Engineering (KIE) secured several large scale infrastructure projects, growing the orderbook to S$3.5b to date and ensuing recurring income stream for the next 10-20 years. KIE's latest project for an EcoPark at Doha North Sewage Treatment Works was announced yesterday.

Revising our estimates, but still a BUY. In view of potential margin erosions and slowdown in order momentum, we are revising down our FY08 earnings estimates to S$962.8m. In addition, we are introducing our FY09 estimates. Based on the current market weakness, we derive a fair value of S$14.80 (from S$17.10 previously) from sum-of-the-part valuation. We reiterate our BUY rating on Keppel.

Major Shareholder: Temasek Holdings 21.3%.

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.

JP Morgan: Keppel Corporation - 1 Feb 2008

Key takeaways from post-results luncheon - ALERT

• Management highlighted P-52 is an isolated incident: Excluding the losses in P-52, O&M operating margins would have been 9.7% instead of 7.8%. Management also stressed that the losses arising from cost overruns with P-52 is isolated as the project is the first it undertook in Brazil and the learning curve was steep. In fact, the losses only pertain to FY07 and the project is still profitable on an overall basis. However, management confirmed that swift actions have been taken to eradicate issues encountered when executing its projects. Management does not see similar problems with its P-51 and P-56. Raw material prices are locked in upon securing of contracts and cost escalation clauses are also built. O&M currently accounts for about 70% of
revenue and 50% of PATMI for the Group.

• Throwing in the kitchen sink: We also understood that management has taken the opportunity, on the back of a strong set of full-year results, to fully write off the S$81MM goodwill in relation to its Brazilian operations – FELS Setal, and impair its infrastructure assets, in preparation for better profitability ahead.

• Infrastructure to see greater contribution moving forward: With the maiden contribution of S$27MM by the 500MW Keppel Merlimau Cogen, Keppel’s two projects in Qatar – the solid waste management center and Doha North Sewage Treatment plant – are also expected to contribute positively to earnings from FY08 and beyond. Management also indicated that the unprofitable EPC projects secured previously in 2002 have been completed and will not be a drag on earnings moving forward.

• Tianjin Eco-City jumpstarts similar interests in the Middle East: The 30-km2 Tianjin Eco-City project has garnered interest from the Qatar Public Works Authority for a similar project to transform and enhance the surrounding area of the 16-km2 Doha North Sewage Treatment Works into an EcoPark to showcase ideas on sustainable and resource-conscious development.