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Breakdown: KepCorp’s Lacklustre Start To 2013
Breakdown, Tradeable | 23 April 2013
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By: Simeon Ang
Articles (125) Profile

45 years. That is how long Keppel Corporation (KepCorp) has been in business for. As a local champion, much emphasis is placed on how the group fares. Hence, it is not much of a surprise that the counter faced some selling pressure after releasing less than stellar financial results on 18 April 2013.

To be sure, KepCorp’s 1Q13 financial report card was not expected to be as good as 1Q12. This can be put down to how KepCorp recognises revenue from its residential segment. Overall, KepCorp recorded a 52.5 percent drop in net profit from $750.8 million in 1Q12 to 1Q13′s $356.9 million. Revenue slid 35.3 percent as KepCorp cited declines in work volume at its offshore and marine division, as well as a drop in revenue recognition from sales of its residential development, Reflections at Keppel Bay.

Nonetheless, KepCorp ’s management feels that the industry fundamentals continue to remain “compelling”. Do analysts agree? What do they think about KepCorp ’s 1Q13’s performance?

Parsing through several research reports, it seems that analysts are pointing to margins in KepCorp ’s offshore and marine sector. For example,

Low Pei Han and Chia Jiun Yang of OCBC note that KepCorp ’s management continues to be relatively “happy” with the operating margins of its offshore and marine sector. Margins for the sector stood at 14.1 percent, lower than 1Q12’s 15.1 percent but still an improvement from 4Q12’s 13.5 percent. They attribute this improvement partly to the fact that,

“… the group has been executing orders of similar designs, resulting in more efficiency after the initial learning curve.”

They also point to a bonus $5 million received due to early delivery of all five rigs in 1Q13.

Pei Han and Jiun Yang’s Call: BUY, with target price of $12.68 (potential upside of 12 percent*)

However, analysts from OSK Research, namely, Jason Saw and Lee Yue Jer, feel that KepCorp will begin to experience a normalisation of margins at its offshore and marine sector. They agree with KepCorp ’s long-term margin guidance of around 10 to 12 percent. They conclude that,

“… the normalising (offshore and marine) margins and property-cooling measures are likely to cap the re-rating process in the near term.”

That is to say that, due to the above factors, both Jason and Yue Jer feel that their calls on the stock are unlikely to be adjusted anytime soon.

Jason and Yue Jer’s Call: NEUTRAL, with target price of $11.21 (potential downside of 1 percent*)

On an even darker note, Lim Siew Khee of CIMB anticipates a steady decline in KepCorp ’s order book by end 2013. It is worthy to note that KepCorp experienced an explosion of orders during 2011 and 2012. As of 1Q13, KepCorp ’s order book stood at $13.1 billion, which includes about $1.7 billion worth of order wins during the quarter. She writes,

“Despite the decent order momentum for jack-up rigs (in 1Q13), order wins are unlikely to exceed the $10 billion achieved in 2011 and 2012 (respectively due to jack-up rig rush and Sete-Brasil’s orders). Therefore, the order book will decline to about $10 billion by end-(2013).”

Siew Khee’s Call: NEUTRAL, with target price of $11.90 (potential upside of 5.1 percent*)

Perhaps sensing that there might be a need to diversify its revenue streams into other fields, KepCorp recently announced a partnership with a seabed technology expert (UK Seabed Resources, a subsidiary of Lockheed Martin UK). The partnership will look into subsea mining, which carries the potential of harvesting superb quality minerals in huge amounts.

DBS Vickers’ Janice Chua and Ho Pei Hwa, however notes that subsea mining has become a point of interest in recent years. They point out that,

“It is too early to judge the new development as we are unsure of the viability of this project… It seems to be an exciting opportunity that could aid mid-to-long term growth of KepCorp , though it also comes with higher operational risks.”

Janice and Pei Hwa’s Call: BUY, with target price of $13.00 (potential upside of 14.8 percent*)

It might seem that the days of higher-than-average margins and profits might be over for KepCorp . However, KepCorp remains as a good way (and most analysts claim, the preferred way) to gain exposure to the oil and gas industry.

*Based on KepCorp ’s closing price of $11.32 on 22nd April 2013

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Simeon, an LSE graduate, is currently the editor of Aspire. He specialises on topics surrounding trading psychology, politics and macroeconomics.

Please click here for more information about this author.

Keppel Corp  6.040 -0.04 -0.66%   
Business: [FY18 Turnover] Infrastructure (44.1%), offshore & marine (O&M) (31.4%), property (22.5%), investments (2%).

Insight: Apr-19, 1Q19 revenue rose 4.1% underpinned by high... Read More

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