Strong O&M margins. 2Q09 operating margins of 11.8% were above guidance of 8-10%, thanks to better cost control from the execution of repeat rig orders. We believe the margin strength can be sustained into 2H09 and expect stronger revenue with 38 scheduled deliveries (1H09: 15 deliveries).
Order-cancellation risks reduced; hopeful on Brazilian order wins. O&M order book was S$7.7bn with S$330m of order wins to date. Management does not foresee more order cancellations and is cautiously confident of capturing some orders by end-2009. With its yard facilities in Brazil and track record with Petrobras semi-sub orders (P52, P51 and P56), Keppel is in a good position to capture Brazilian wins. We leave our order-win assumption of S$1.5bn for 2009 intact.
Conserving cash for growth. An almost unchanged interim dividend of 15 Scts (1H08:14 Scts) was declared, despite stronger earnings and cash of S$3.3bn (1H08: S$1.6bn). The excess cash could be used to fund expansion in Infrastructure or Property. However, we believe some special dividend could be announced in FY09. About S$2bn of the cash comprises deposits collected from O&M.
Earnings estimates raised by 6-9% for FY09-11, to incorporate: 1) higher sales and margin assumptions for O&M; and 2) our earnings upgrade for Keppel Land.
Maintain Outperform with higher target price of S$9.00 (from S$8.50), still based on sum-of-the-parts valuation. Our target price rises as a result of higher earnings assumptions for O&M and an increased target price for Keppel Land.
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