Share Price S$11.16
Target Price S$13.10
Keppel Corporation (Keppel) is a conglomerate with its earnings coming from three core businesses: offshore heavy engineering, property and infrastructure. Subsidiary Keppel Offshore & Marine (O&M), with a network of 20 shipyards and offices worldwide, is a leading builder of offshore drilling rigs and oil & gas production systems.
• 2014 is poised for roaring contract wins. We project annual contract wins of S$6b (2012: S$9.9b) for 2013-15. The recent US$1.1b order from US driller Transocean for the building of 5 drilling jack-up rigs has pushed Keppel’s contract wins ytd to S$6.4m, thus marginally surpassing our projection for 2013. There is an option for another 5 rigs that could yield another US$1.1b order.
This coupled with a potential order for 6 jack-up rigs – with contract value estimated at US$1.2b – from Keppel’s yard tie-up with Mexico’s PEMEX mean potential contract wins of US$2.3b (S$2.9b) for 2014.
• Healthy O&M operating margins thus far. Keppel registered healthy O&M operating margins of 14.0%, 14.2% and 16.5% for 1Q13, 2Q13 and 3Q13 respectively, up from 4Q12’s 12.8%. Stable-to-rising O&M margins over the last three quarters are a clear sign that O&M margins have bottomed. This should remove investor concern that has been a dampener on share price.
• Staying ahead of competition. More yards are entering offshore heavy engineering due to dwindling shipbuilding orderbooks of conventional ships (ie bulk carriers, containerships and tankers), as a result of a poor global shipping market. Singapore rig builders are facing nascent competition from Chinese shipyards in the standard jack-up rig segment (US$200m apiece). Separately, South Korean yards are muscling into the harsh-environment jackup rig space because of its sizeable contracts (US$600n apiece). Keppel effectively mitigates competition through two strategies: a) delivery on time and on budget, and b) near-market, near-customer. Furthermore, Keppel is targeting to clinch a maiden order for its compact drillship design in the near term. If successful, this will mark its penetration into the drillship market that has long been dominated by South Korean yards.
• Maintain BUY on positive long-term outlook. Our target price of S$13.10 is based on sum-of the-parts valuation. We value Keppel’s O&M business at a PE of 15x 2014F earnings.
Publish date: 28/11/13