Friday, October 28, 2005

Keppel Corporation Analyst Report

Keppel Corporation
Oct 27 close: $11.40
KIM ENG RESEARCH, Oct 26




NET profit for the third quarter came in at $138.7 million, which is just 3 per cent below our forecast of $143.2 million and in line with market expectations. This is a 23 per cent improvement over 3Q04 and a sequential increase of 2.8 per cent. The variance from estimates was due to the recognition policy in the Offshore and Marine division, as it books sales and earnings in different stages from its rig and ship building activities.

Turnover for the O&M division increased by a whopping 52 per cent. Ebitda did not keep pace, and actually declined by 14 per cent sequentially to $83 million. Consequently, margin for O&M plunged from to 7 per cent from 12.2 per cent in the previous quarter. However, management has assured us that this is solely a timing issue, and we expect Ebitda margin to return to the low teens for the full year.

Keppel O&M also is building on its deepwater capabilities, collaborating with J Ray McDermott for new solutions and acquiring patent rights for other designs. This is to take advantage of the robust demand for semi-submersibles which have seen day rates almost double.

Overall, the results provided no surprises. However, we are tweaking our FY05 forecast down marginally, and we now expect net profit of $602.8 million versus $607.4 million previously. This represents 29 per cent growth in net earnings.

Earnings per share at 76.9 cents is slightly ahead of consensus' 74.3 cents. Due to the timing of its profit recognition in the O&M division, Keppel's earnings may be more spread out than currently expected. Ultimately, however, its orderbook of $7.9 billion reinforces the positive outlook for Keppel's three-year earnings horizon, which is what has driven its share price outperformance since the beginning of the year. Our sum of the parts fair value for Keppel Corp remains unchanged at $14.20, and we maintain our 'buy' recommendation.
BUY

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