Keppel Corp - RHB Invest 2017-06-30: New Offshore & Marine Contracts

Keppel Corp - RHB Invest 2017-06-30: New Offshore & Marine Contracts KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corp - New Offshore & Marine Contracts

  • We estimate that Keppel’s current orderbook stands at SGD3.8bn, as it had added another SGD85m worth of new orders with recent contract wins. 
  • The company has also finalised its Borr Drilling novation agreement, which should underpin better cash flows and lower risk of impairment. 
  • Going forward, recurring income from its infrastructure and investment divisions would continue to complement its O&M and property earnings. 
  • Maintain BUY with revised SOP-based Target Price of SGD7.34 (from SGD7.55, 15% upside).

New O&M contracts. 

  • Keppel Corp (Keppel) announced recently that it had secured four conversion and repair projects worth SGD85m at its offshore and marine (O&M) segment. 
  • The first two contracts was for the conversion of an oil tanker to an FPSO, the third was for the conversion of a semisubmersible heavy lift vessel to a crane vessel, while the last contract was for a major refurbishment of an LNG carrier. The projects will be delivered between 3Q17 and 1Q18. These recent awards bring O&M YTD total contracts to SGD361m.

Three-way agreement completed. 

  • Keppel also announced that it had signed a definitive agreement with Borr Drilling to novate the construction contracts of five jack-up rigs originally built for Transocean. The rigs will be delivered in stages from 1Q18 to 2020. 
  • The agreement will improve Keppel’s cash flow and minimise the risk of further impairment to its balance sheet.

Recurring income to complement O&M. 

  • Keppel is focusing on expanding its stable recurring income at its infrastructure and investment divisions. These sources of income would complement the earnings that are based on projects at its O&M unit. 
  • In FY16, c.40% of its net profit came from a recurring base. The company recently announced the ground breaking for the Keppel Marina East desalination plant, which will be Singapore’s fourth desalination plant. The desalination plant will be on a design, build, own and operate model and is slated to start operations by 2020.

Property remains a key contributor. 

  • In 1Q17, property contributed 39% to Keppel’s bottomline. Keppel has a remaining landbank of 1.1m sqf in Singapore and 4.9m sqm in China. 
  • In 1Q17, China sales came in at CNY1.2bn (c.SGD245m). RHB’s China economist expects property spending growth to moderate heading into 2018.

Maintain BUY. 

  • Although O&M contributions remain relatively sluggish, we believe Keppel’s strategy to focus on non-drilling and specialised projects is the right move, as evidenced by its contract wins YTD. 
  • We adjust our Target Price to SGD7.34 as we adjust our discount rate and valuation for Keppel Land, Keppel Capital and the O&M division. 
  • We maintain our BUY recommendation. 
  • Note that Keppel’s current share price reflects the valuation of its business ex-O&M.
  • We make no changes to our earnings forecasts.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-06-30
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 7.34 Down 7.550