Keppel - Robust 2Q09, higher interim dividends

Keppel’s 2Q09 net profit, including exceptional items, rose 147% y-y to S$739.5mn, and was up 6% y-y to S$317mn (excluding EI). Group EBIT grew 36.6% y-y to S$357mn, with O&M accounting for 75% of EBIT, property for 21% and infrastructure for 6.7%. 2Q09 group EBIT margins improved to 11.1%, mainly reflecting higher O&M margins. The group associate earnings declined 43% y-y to S$98mn, reflecting the earnings decline of recently divested Singapore Petroleum Company (SPC) (previously 45.5%-owned). SPC has since ceased to be an associate, after the stake was sold to PetroChina at S$6.25 per share or S$1.47bn in June 2009.

The group booked exceptional gains of S$621mn from the SPC divestment but this was offset by total impairment charges of S$189mn in the quarter, mostly reflecting asset write-downs at its infrastructure (S$113.8mn write-down) and goodwill write-offs (S$15.5mn) at its offshore & marine divisions. In 2Q09, the group’s property division EBIT gained 3.3% y-y to S$76.5mn while infrastructure EBIT rose to S$23.8mn from S$1.4mn previously.

Offshore & Marine 2Q09 EBIT rose 45.2% to S$267mn, with EBIT margins improving to 11.8% from 10.1% in 2Q08, and was also higher than the 10.4% achieved in 1Q09. While the group did not win any new O&M orders in 2Q09, management expects the group’s S$7.7bn orderbook to keep its yards busy, with deliveries into 2012. The group secured new orders totalling S$5.2bn in 2008.

We maintain BUY with a PT of S$8.57, which is pegged at a 5% discount to our SOTP value of S$9.03. We value the O&M division using DCF over a 20-year period, incorporating a cyclical downturn in earnings from FY10F, and a WACC of 7.5%. The group’s other businesses are valued at the current market prices.

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