Keppel - O&M core operations remain strong

Core above expectations. 2Q09 core net profit of S$318m (+6% yoy) was 27% above our estimate but in line with consensus, thanks to stronger-than-expected earnings from Offshore & Marine (O&M) and Property. 1H09 core profit of S$603m (+8% yoy) forms 58% of our FY09 forecast. 1H09 reported profit of S$1.02bn (+83% yoy) was below our estimate and consensus, due to a S$189m asset impairment charge for Infrastructure and O&M that offset its SPC divestment gain.

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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Pacific Shipping Trust - 2Q09: Retaining cash for acquisitions

PST is distributing 2Q09 DPU of 0.99 US cents, implying a yield of 16% p.a., but is reducing its 3Q09 distribution policy from 90% to 70% to fund future vessel acquisitions.

Pacific Shipping Trust (PST) reported 2Q09 net profit of US$6.7m (+0.8% qoq, -20.2% yoy). Excluding losses from interest rate swaps, earnings would have been US$8.7m (+0.5% qoq; +79.6% yoy). PST declared a 2Q09 DPU of 0.99 US cents, similar to 1Q09 DPU of 0.98 US cents, but lower than 2Q08’s 1.09 US cents.

We estimate 2009 and 2010 dividend yield of 12.7% and 10.0% respectively after adjusting for a change in distribution payout policy from 90% to 70%. Maintain BUY with target price of US$0.37.

The trust is reducing payout ratio from 90% of distributable cash flow to not less than 70% for 3Q09. The cash retained will be applied towards funding of acquisition of one or two mid-sized chemical tankers and/or offshore support vessels at US$20m-30m each in the next six to 18 months. While no guidance is given on whether the distribution policy will be maintained at 70% going forward, we do not rule out the possibility that the trust may further reduce payout ratio should the need arise to fund acquisitions. That said, we view this positively as ship prices have fallen sharply from their peaks in 2008. Accretive acquisitions may drive a re-rating of the stock.

In view of the change in distribution policy from 90% to 70%, we reduce our DPU forecasts for 2009-11 by 5-22%. PST has no loan-to-value covenants in its loan documents. All loans are amortised. Its current net gearing stands at 89%, the lowest among the shipping trusts. We forecast 2009 and 2010 dividend yield of 12.7% and 10.0% respectively after adjusting for the reduced distribution payout ratio. Maintain BUY with target price of US$0.37 based on 2010 P/B of 0.9x, higher than the P/B ascribed to the other two shipping trusts given PST’s stronger financial position.

Ezra 10 year growth plan

Ezra holdings shared their 10 year growth plan. The key thrust for the Ezra group from 2010 onwards would be to address the sub-sea industry. Independent industry research by Douglas-Westwood values this sub-sea market at US$162b (2009-2013).

This will be the key target market with their new Multi Functional Support Vessels (MFSVs) to be delivered in Jun 2010 and Sep 2010.

Our take:

1) No additional earnings impact. We are not accreting any new impact as we've already catered for the MSFVs' contributions. Unless contract wins announced in Jun 2010 onwards exceeds our earnings expectations, we will be retaining our current forecasts.

2) No new capex required. The Ezra group will not need any new capex for this penetration into the sub-sea market.

3) More clarity on new business direction. With the uncertainty in the AHTS market rates, we are comforted that the group has a clear roadmap to acquire new businesses. Ezra aims to have an equal split (1/3-1/3-1/3) in its revenue from offshore (mainly AHTS charters), sub-sea work and Marine construction work (mainly Vietnam yard) in 5-7 years time.

We are retaining our BUY rating and fair value of S$1.46.