Singapore Stock Keppel Corp: What Is The Potential Upside?

Excerpts of  foreign brokers’  recommendations on Keppel Corp (KEP)….

UBS maintains buy with target price of $9.60

(UBS analyst - Cheryl Lee): Order book is S$5.8bn, replenishment critical but on the way:

Abt 65% of the order book would be wound down in 2010, so replenishment is critical. We expect S$1.5bn new orders from Petrobras soon, and assume further S$3bn orders through 2010. KEP is strategically well positioned, so the key risk is award delays as this is not within KEP’s control.

In a bear scenario where there are no new orders through 1H2010, we est. ~15% downside to 2010E EPS forecasts. Given KEP’s strong earnings track record - it has for the last 3Qs beat consensus’ forecasts - we believe risk/reward still favours a bullish stance on the stock.

� Significant gains from sales of Caribbean units originally kept for leasing KEP sold 109 units of the Caribbean at Keppel Bay property project in Q309 at an estimated ave selling price of S$1,290psf, vs estimated breakeven of S$675psf.

(KEP had kept and leased 168 units as corporate residences.) Pending final completion, KEP had not recognised any of the profits in Q309. Hence we expect a $60m net profit kicker to be recorded in Q409 and have accordingly raised ests.

� Valuation: S$9.60 price target based on sum of parts. We value offshore on DCF and impute listed entities at market price.

Keppel has doubled or so in the past year.

Citigroup’s target price is $9.15

(Citi analyst - Horng Han Low): Results outperform: 9M09 PATMI (ex-EI) S$922m is ~80% of our FY09E estimates and beat our expectations by 6% with O&M (strong margins) and property (higher sales recognition) contributing 64% and 14%, respectively.

The strong O&M margin achieved in 3Q09 is the key highlight - EBIT margin surged to 13.8% (+130bps QoQ and +260bps YoY), the highest since 1Q04. Investment profit declined slightly YoY due to SPC sale. 3Q09 annualized ROE remains healthy at 22.6%.

Maintain Buy - We continue to like Keppel and reiterate our target price of S$9.15. We see catalysts emerging from contract wins in both Infrastructure and O&M divisions. Our orderbook estimate of S$3-4bn for 2010-11 looks achievable and conservative, in view of Petrobras’ recent capex commitment.

Note: S$ in millions, year-end Dec: JP Morgan’s latest forecasts…..

JP Morgan’s target price: $9.70

(JP Morgan analyst - Ajay Mirchandani): Falling order book a key area of concern but (a) PBR’s 28 rigs, (b) oil prices, (c) ‘other’ opportunities should provide price support.

Keppel’s net order book stands at S$5.77B (its lowest since 1Q05) and has been falling since 3Q08. While this is a worry, we remain positive on Keppel given

(a) Keppel’s yard presence in Brazil (especially with competition limited to locals and SMM),
(b) oil prices at US$80/bbl and the improved outlook highlighted by driller (Transocean, Noble) equipment manufacturers (Aker), and
(c) a number of other order book opportunities amounting to nearly US$1B.

Price target, valuation, key risks: Our SOTP-based Jun-10 PT implies 12.7x 2009E earnings, and a 3.6% dividend yield. Key risks to our PT include a greater-than-expected delay in new orders and a

collapse of oil prices.

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