Keppel Corporation - OCBC Securities 2015-09-10: Taking the longer term view.

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KEPPEL CORPORATION LIMITED BN4.SI 

Taking the longer term view 

 Lower oil price forecasts 

 Offshore earnings momentum to turn 

 Lower fair value to S$6.95 

Update from management 

• Keppel Corp recently hosted a lunch briefing for analysts in which the group touched on its overall strategy going forward, and provided updates on its business segments. 

Offshore – tough outlook; yards busy till 2016 

• Keppel is still busy with rig repairs and sees orders from non-drilling products, but considering that the group will be delivering 15 rigs this year, eight in 2016 and six in 2017, we think core earnings momentum may start turning soon, justifying the stock’s current attractive valuations. Keppel also reiterated that it is still working with Sete on how to best finance the fifth and sixth semi-submersible rigs. 

Property – focus more on returns 

• With the privatization of Keppel Land, the property business can now focus more on returns rather than churning assets to generate profits, a pressure it faced previously as a listed entity. Though the emerging markets of China and Indonesia could encounter speed bumps along the way, the group is positive on the longer term outlook of its major markets. 

Infrastructure – BOT, BOO projects 

• The group is pursuing build-operate-transfer (BOT) and build-own-operate (BOO) projects; though this may be more capital intensive, they generate more recurring income over the longer term. With Keppel Infrastructure Trust and Keppel DC REIT, the group is able to unlock value in assets once they stabilize. 

Lower FV to S$6.95 on lower oil projections and O&M valuation 

• OCBC Treasury Research and Strategy recently lowered its forecasts for oil prices (WTI: US$45- 50 for end 2015 and US$60 for 2016; Brent: US$50-55 for end 2015 and US$70 for 2016). With this, we refine our estimates, and also trim our new order assumption for 2016 from S$3b to S$2.5b, such that our earnings estimates are lowered by 3-6% for FY15-16. 
• We also lower our P/E for the O&M segment from 13x to 10x to be in line with peer. After updating the market values of the group’s listed entities, our fair value estimate drops from S$8.41 to S$6.95. 
• Maintain HOLD.

Low Pei Han | http://www.ocbcresearch.com/ OCBC Securities 2015-09-10

HOLD Maintain HOLD 6.95 Down 8.41