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