Keppel Corporation - CIMB Research 2017-08-24: Gassing Up

Keppel Corporation - CIMB Research 2017-08-24: Gassing Up KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Gassing Up

  • Keppel secures a US$400m contract for two LNG containerships, bringing YTD orders close to S$900m, in line with our S$1.5bn target. Order book lifted to c.S$4bn.
  • This is positive as the maiden Jones Act vessels open doors to more non-rig contracts. We estimate EBIT margin to be in the high single-digit range.
  • Maintain Hold and TP of S$7.24, still based on SOP valuations.

Maiden Jones Act contract

  • Keppel AmFELS in the US has secured a contract worth more than US$400m from Pasha Hawaii to build two Liquefied Natural Gas (LNG) fuelled containerships. The 774-foot vessels, which can carry 2,525TEU, will run completely on LNG fuel, hoping to achieve 15-30% cost efficiency.
  • The Jones Act requires vessels carrying goods between US ports to be built in the US.
  • This is KEP’s first Jones Act vessel, which now places it on par with its Singapore-listed peer ST Engineering’s marine division (VT Halter Marine), which has been building vessels in the US under the act. Pasha Hawaii was also STE’s customer for several roll-on/roll-off car truck carriers based on a third-party design, which later saw some provisions made for cost overruns.
  • Relatively, we believe KEP could have better control as the LNG containerships are its proprietary design.

Flexing muscle in gas solutions

  • This contract is part of KEP’s vision to gradually flex its muscle in the gas solutions value chain, from the building of FLNG, FSRU and LNG vessels to bunkering.
  • In Mar 17, its Singapore yard secured a S$103m contract to build two LNG carrier vessels for Stolt Nielsen Gas.

Shot in the arm for order book

  • With this contract, KEP’s order book is boosted to S$4bn, which is much needed as its O&M segment barely broke even in 1H17 on the back of declining revenue and a dwindling order book.
  • Given that it is a shipbuilding contract and KEP’s first, we estimate the EBIT margin to be a high single-digit, lower than the rig margin of 12-15%.

Maintain Hold and target price of S$7.24

  • We think Keppel Corp's share price is likely to react positively to the news. Our target price is still based on SOP, where we value its property division at 0.8x FY17F P/BV (in line with average Singapore peers), its offshore & marine at 1.5x FY17F P/BV (in line with SMM’s target valuation) and Keppel Capital at 18x P/E.
  • We think order momentum may still be patchy as KEP gradually moves up the gas value chain. Hence, we keep our EPS and Hold recommendation with an unchanged SOP-based target price of S$7.24. 
  • Re-rating catalysts could come from an acceleration in order wins. 
  • Downside risks include slower orders.

LIM Siew Khee CIMB Research | 2017-08-24
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 7.240 Same 7.240