Keppel - Valuations still attractive

In the running for new FPS orders. Trade publication, Upstream, recently reported that Keppel O&M has jointly collaborated with J Ray McDermott to tender for a spar construction contract for work in Kodiak Field, Mississippi, Gulf of Mexico. Separately, we read that Keppel has also expressed keen interest for eight of Petrobras’ hull construction contracts. While we are unable to verify the status of the projects at the point of writing, we remain confident that these bids would translate to new orders momentum, given Keppel’s quality deliverables and strong track record. As such, we raise our new order estimates from S$2.2b/S$2.6b to S$3.0b/S$3.5b for FY09F/10F. Thus, our FY10F net profit is raised by 5%.

O&M customers’ concerns somewhat alleviated, except for Skeie Drilling. Skeie Drilling (of which Keppel owns 5%) is currently constructing three jack-up rigs at Keppel FELS, and the delivery deadlines have been extended by 4-6 months with the last jack-up due in Jun 2011. According to Skeie’s 17 Apr’s press release, Skeie requires a total capex and funding requirement of US$1.6b and would be seeking bondholder meetings to conclude this new capital raising by late May 09. While we remain cautious on customers’ non- payment in the near term, we expect fewer such events to happen as credit conditions improve, going forward.

Valuations below normalised levels, even after the recent share price rebound. Keppel O&M’s trading valuations at an implied 10.1x FY09F P/E and 12.3x FY10F P/E, are still lower than normalised levels, even after the recent share rebound. Given the more optimistic outlook and new order flow momentum, we have changed our valuation framework to P/E from P/B, applying 16x P/E on FY10F EPS for Keppel O&M. We have also updated DMG’s target prices and share prices of the listed entities, deriving a new target price of S$7.96 (from S$5.24 previously), representing an upside of 17.4%. Upgrade from NEUTRAL to BUY.

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