by winston » Fri Oct 24, 2008 2:23 pm
From Kim Eng:-
Keppel Corp – 3Q08 results (Rohan Suppiah 64321455) Previous day closing price: $4.00
Recommendation: Hold (maintained)
Target price: $6.72 (reduced from $7.65)
O&M still solid
Keppel Corp recorded a 10% growth in 3Q08 earnings to S$272.9m, but was down sequentially by 9%. Earnings from Offshore and Marine (O&M) remained robust, with EBITDA growing 26% sequentially. However, the shortfall came from:-
1) the dismal showing of SPC, which recorded a 99% drop in quarterly earning due to thinner refining margins, with the recent sharp slide in crude oil prices; as well as
2) flat contributions from its property division. While infrastructure recorded a sequential doubling of earnings, primarily from its CoGen plant, its overall contribution remains relatively small and uneven.
Offshore still good for the long run
Keppel has stressed that while its O&M earnings are expected to be solid for the next 18 months on its current orderbook, it has acknowledged that the near-term prospects for new orders may be muted in the current tight credit market. However, it believes that the underlying demand for offshore equipment is intact, with crude oil prices currently still above the estimated US$50 per barrel profitability threshold for offshore oil. It also does not expect any significant order cancellations, as its orderbook is well diversified with strong customers, including national oil companies. Furthermore, O&M has received 50% payment for all contracts.
Cutting earnings for SPC and Property
We are cutting our FY08 forecast by 10% to S$1,051.0 on the back of lower contributions from SPC and property, implying a 7% decline from FY07. FY09 earnings are also cut by 5%, but we are still forecasting 26% growth on the back of a steady performance from O&M and accelerating earnings from Infrastructure. We are also cutting our DPS assumption, assuming a 67% payout ratio versus almost 100% in FY07 (including its capital reduction). Keppel may choose to preserve cash in the current market environment, either for prudence or to fund potential acquisitions.
Earnings are solid, but will the market pay attention?
We are adjusting our sum-of-the-parts valuations to
1) market prices of listed entities;
2) a 8x multiple on lower prospects of its O&M division; and
3) lower potential selling prices of Reflections.
This yields a fair price of S$6.72 per share, or 68% upside to its current share price. While this upside potential, coupled with a yield of 11% is compelling, we maintain our Hold recommendation pending more stability in the broader market.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"