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.

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.

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.

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%.

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 | http://research.itradecimb.com/ 2017-08-24

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 7.240 Same 7.240