Keepl - await the Petrobras 'order-train'

Upgrade Keppel Corp to OW: We upgrade Keppel Corp from Neutral to Overweight and raise our PT to S$9.50, representing 21% upside from the current share price. Three key reasons for our upgrade are: (a) better than-expected 2Q09 earnings driven by O&M segment’s margin expansion (11.8% for 2Q09 versus 10.1% for 2Q08); (b) recent steps taken by management to streamline its business (SPC sale, KPLD rights issue) resulting in ‘clean net cash' position of S$200 million (from ‘clean net debt’ of S$835 million); and, most importantly, (c) potential new orders from Petrobras with near-term focus on (i) eight FPSOs hulls bid out by Aug'09, and (ii) next round of 7-11 deepwater rigs.

O&M segment surprises on margins; we raise FY09E/10E/11E EPS by 12%/14%/17%: Keppel reported a 2Q09 recurring net income of S$317 million versus J.P. Morgan’s estimate of S$270 million, 17.4% better than expected. The key reason for the variance was the stronger than-expected performance by the O&M segment due to steep expansion in the EBIT margin from 10% in 1H08 to 11.1% in 1H09.

Petrobras orders remain the big driver for offshore sector; three ‘potential’ near-term opportunities for Keppel: While the upcoming round of 7-11 rigs (7 PBR-owned and the rest being chartered out) remains the key opportunity for Singaporean/Korean yards, in the near term we see additional potential catalysts for Keppel, namely (a) potential US$4 billion order for the eight FPSO hulls (the entire set of eight hulls is likely to go to a single winner), alongside (b) news flow of Technip being a leading candidate for P-58 and P-60. Given Technip and Keppel’s close working relationship for P-51, P-52, and P-56, Keppel may benefit if these two assets are eventually awarded to Technip.

Price target, valuation, key risks: As a result of our raised estimates and new timeframe of Jun-10, our PT increases to S$9.50. This implies 14x 2009E earnings and a 3.7% dividend yield. We believe the key risk to our PT is a continued global slowdown leading to worse-thanexpected new orders.

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Ezra - Sub sea journey

By adding new specialized equipment and functions to assets it already has under construction, Ezra is increasing their market value. These assets will be destined to support deepwater sub sea services (the company’s new area of growth) instead of exploration services. Our FY11 EPS estimate rose by 11% after taking conservative estimates on the new assets, but could rise by another 20% in a blue-sky scenario. At 7.7x FY10 PE the stock is cheap. Maintain BUY. New TP holds 54% upside.

Ezra’s new growth strategy is focused on the drilling market (support of oil production activity) instead of the exploration market. This is the market where oil majors are spending their additional capex dollar. Ezra plans to grow through the addition of highly specialized vessels that perform installation and maintenance work for drilling projects in the deepwater sub sea segment. While the long term chartering of its current fleet of 25 AHTS vessels, which support exploration rigs, will provide a stable earnings source.

By adding new specialized equipment such as drilling towers, ROVs and moon pools to assets that it already has under construction and by providing a highly qualified team of engineers, Ezra is able to bid for contracts in the deepwater sub sea segment that could obtain significantly higher charter rates than if the assets were to be used to in the exploration segment. For example, after converting a pipe-laying barge into a DP3 sub sea construction vessel, Ezra could potentially obtain charter rates of US$250-300,000/day instead of the US$130,000 we had factored in.

After taking conservative estimates on the DP3 and 2 MFSV assets that Ezra will use for the sub sea segment, our FY11 earnings estimate rose by 11%. In a blue-sky scenario, our FY11 EPS estimate could be another 20% higher than our new estimate. Besides this the company has signed an agreement with a third party to market and operate their support vessels in return for a share in their profits. This could add another US$8-10m in earnings annually.

Based on our new earnings estimates, Ezra is trading at 7.7x FY10, more than one standard deviation below its long term average. We value the stock at S$2.10/share, based on our DCF-derived target price, 11% above our previous target. Risks remain on the FPSO for which Ezra has yet to be paid.

MARCO POLO Marine - Ship Repair Expansion To Offset Shipbuilding Downturn

Marco Polo Marine Ltd (MP) is an integrated shipping group principally engaged in: a) ship chartering, which includes the provision of chartering, re-chartering and transhipment services of tugboats and barges and b) shipyard operations, which include the provision of building, repair and broking services of tugboats and barges. As of end-1HFY09, the Group had a shipbuilding orderbook of S$51.9m, excluding S$29.8m shipbuilding projects meant for its own ship chartering business. MP currently operates a fleet of 55 vessels.

Stable and constant ship chartering revenue. The ship chartering rates for most offshore support vessels (OSV) have fallen by 20-40% from their peaks but the rates for tugboats and barges have remained stable, according to MP’s management. MP is also the exclusive supplier of chartering services of tugboats and barges to BRJ, a major customer controlled by the Lee family. The products transported for BRJ and other Indonesian customers are mainly mining products such as granite and aggregates mined in Indonesia, mainly for the construction, infrastructure, property development and land reclamation industries in Singapore and, to a lesser extent, Indonesia.

Recurring earnings through JV with Glencore International AG, one of the world’s largest suppliers of a wide range of commodities and raw materials to industrial consumers. The 50:50 JV (MPST Marine Pte Ltd (MPST)) is to jointly own and operate a fleet of tugboats and barges for the provision of transhipment services of cargoes for Glencore and/or its related corporations and affiliates. MP will procure shipbuilding and supply of an initial fleet of 24 vessels, out of which 10 were delivered and 14 are scheduled for delivery by end-09. MP expects recurring contributions to its earnings through the share of profits in the jointly controlled MPST.

Ship repair expansion to offset shipbuilding downturn. The management expects its ship repair business to contribute significantly to its shipyard operations once the second dry dock (currently under construction) becomes operational. Ship repair business tends to generate higher gross profit margin of 35-50% than shipbuilding (15-18%) and it is less cyclical given the recurring need for maintenance and repair of vessels. Management guided that each of the two dry docks has the capacity to repair six to eight vessels per month at a cost of S$150,000-S$300,000 per repair work. MP is currently trading at 1.9x P/B and 8.9x PE. The hybrid OSV sector that MP falls under is trading at 1.3x P/B and 6.3x PE.