Keppel Corporation - CIMB Securities 2015-09-02: Jacking up its asset search.


Jacking up its asset search 

  • KEP is on the lookout for more opportunistic investments, going by its recent acquisition of Cameron’s Letourneau rig design division, in preparation for a bigger market share when the rig market recovers. 
  • Its bid for Asia Square Tower 1 could also increase its exposure to the Singapore property market. 
  • We keep our Add rating but lower our RNAV-based target price to S$7.46 as we incorporate reduced earnings from O&M as a result of our blanket order cut and deferral of Sete Brasil‟s semi-submersibles. 
  • Our EPS forecasts are up by 1-7% with higher earnings contribution from the property division. 
  • Including dividend yields of 5%, KEP could still yield a total return of c.13%. 
  • Key catalysts could come from earnings-accretive M&As. 

Increase rig design market share 

  • Recently, KEP announced that it is paying US$100m for Cameron‟s offshore rig business comprising the Letourneau jack-up rig designs, rig kit business and after-market services. The deal stems from Schlumberger's US$12.71bn acquisition of Cameron. With this acquisition, Keppel is able to offer enhanced jack-up rig EBIT margin as high as in their 20s% as proprietary designs usually command higher margins. Letourneu rigs make up about 27% (Keppel FELS: 16%, SMM Baker Marine: 14%) of global drilling rigs and 12% (Keppel FELS: 21%, SMM Baker Marine: 6%) of those under construction currently. 
  • Asia Square Tower 1 KEP is also said to have submitted its offer for Asia Square Tower 1 (c. 1.2m sq ft of office space) at a price of S$3.5bn, contending against Capitaland and the Norwegian sovereign wealth fund. An agreement could be reached by Oct 15. Based on our back-of-envelope calculation assuming 85% occupancy at rental of S$10/sq ft and 60% loan financing at 3.5% interest rate, it could generate S$15m PAT to KEP. 
  • Though small, this could be a trophy asset for KEP to up its exposure to the Singapore property development market. Property accounts for 35% of our FY15-17 net profit forecasts for KEP, with O&M still at c.50%. 

Blanket cut in orders and delays in Sete Brasil 

  • Given the glut in offshore rigs, the order momentum will remain slow in FY16 as sizeable orders are less commoditised and take longer to come to fruition. 
  • We cut our orders for FY16-17 by 11-26%, now expecting S$2bn for FY15-16 and S$4bn for FY17. KEP has secured S$1.5bn YTD.

LIM Siew Khee | CIMB 2015-09-02
ADD Maintain ADD 7.46 Down 8.88