Keppel Corporation (KEP SP) - DBS Research 2017-08-25: Breaks Into Jones Act Market

KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation (KEP SP) - Breaks Into Jones Act Market

Keppel Corp secures two LNG-fueled containership contracts worth US$400m (approx. S$550m).
Lift YTD wins to c.S$850m or 57% of order assumption.
First newbuild Jones Act vessels secured in the US; more to come tapping on replacement demand for ageing fleet.

Keppel has secured two LNG-fuelled containership contracts worth over US$400m (approx. S$550m) in total from Honolulu-based Pasha Hawaii. The vessels are expected to be delivered in 1Q20 and 3Q20.

This sizeable contract win is an encouraging news as order flow has been slow thus far this year. The new win will lift Keppel’s YTD wins to ~S$850m or 57% of our order assumption of S$1.5bn.
In addition, there are several other significances:

This is Keppel’s first newbuild contracts for Jones Act vessels in US. Jones Act requires vessels carrying goods between US ports to be built in US.
It underscores the importance of Keppel’s global shipyard network. As Keppel AmFELS’s yard is in US, Keppel is well-positioned to tap the replacement demand for the ageing Jones Act fleet.
It is an accolade to Keppel’s innovative, R&D capability and comprehensive offerings of LNG-related vessels.
The contracts are on milestone payment, which is a plus from working capital perspective.

We observe that the contract value for these LNG-fuelled containerships at US$200m each is eightfold the value of traditional heavy fuel oil-powered containerships of similar size (2,525 TEU) that cost US$25m each. This is probably attributable to higher equipment cost and sophistication to construct LNG-fuelled vessels, higher construction cost in US, and higher specifications of the vessels.
The contract value, however, seems reasonable compared to the contract awarded last year by another Honolulu-based player, Matson, Inc. to build two larger combination container and roll-on/roll-off ("Con-Ro") vessels (3,500 TEU) at a contract price of US$511m.
Customised to Pasha Hawaii’s requirements, the 774-foot Jones Act vessels will be able to carry 2,525 TEUs (20-foot equivalent units), with a sailing speed of 23 knots. The ship’s hull has been fully optimised using computational fluid dynamics (CFD) and will be one of the most hydrodynamically efficient hulls in the world. In addition, it will be able to run completely on LNG fuel, dramatically reducing its environmental impact and increasing fuel efficiency.

We expect a learning curve to build this new product type. Prior experience in construction of LNG carriers and containership repairs could help. In addition, it is a relatively small vessel.
Given the decent pricing, the project might be able to deliver high-single-digit EBIT margins, in our view.

While LNG-powered ships are typically 10-25% costlier, they offer fuel cost savings of 15-30% on top of environmental friendliness. LNG is a much cleaner alternative fuel as compared to conventional bunker fuel, reducing up to 95% sulphur oxides, nearly 100% particulate matter, up to 90% nitrogen oxides, and up to 25% carbon dioxide emissions from engine exhaust emissions.
Globally, there are over 100 in-service LNG-fuelled vessels with another c.100 on order, growing at > 20% p.a. over the past two years.

The US-built fleet is considerably older, at an average age of 33-years old versus 13-years old for the global fleet.
Currently, there are about 160 US-built bulkers, tankers and gas carrier vessels in-service on order. The ageing fleet is expected to drive replacement demand for Jones Act fleet in US. Keppel is poised to benefit through its US Keppel AmFELS yard.

Reiterate BUY and Target Price of S$7.60. We continue to like Keppel as a proxy to ride on property and offshore & marine recovery.

Pei Hwa HO DBS Vickers | http://www.dbsvickers.com/ 2017-08-25

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