Weaker quarter as expected. Keppel Corp reported 3Q12 revenue of SGD3,219m (+19.1% YoY, -7.6% QoQ) and corresponding PATMI of SGD346m (-14.7% YoY, -33.5% QoQ). Headline earnings were consistent with our expectations of a weaker quarter, given the absence of lumpy property recognition and normalising Offshore & Marine (O&M) margin. O&M margin disappointed in 3Q12, but were offset by good property segment performance. We remain positive on the longer term outlook and see any negative reactions as opportunities for further accumulation. Reiterate BUY and target price of SGD13.30.

Already surpassed previous year’s net profit. Excluding nonrecurring items, 9M12 net profit of SGD1.61b has already surpassed the SGD1.49b delivered in FY11. O&M segment also regained its position as the largest revenue and net profit contributor. Current O&M net orderbook stood at SGD13.1b with deliveries extending up to 2019. O&M margins below expectations. O&M margin for 3Q12 did turn up higher at 12.9% as compared to the 11.9% (after adjusting for reversal of bad debt; headline op. margin was 13.2%) last quarter. Nevertheless this was still a tad lower than our expectations. We believe that margins would continue to trend up in the last quarter but we lower our full year operating margins assumption from 14.6% to 14.0% as we adjust for this quarter’s lower-than-expected margin.

Opportunities for better rig pricing exist. While Keppel cited pricing pressures due to competition from Chinese and Korean shipyards, we still see chances for better pricing. Firstly, we think that Chinese shipbuilders do not yet have the capabilities to compete for premium rig building jobs and secondly, we see stability in prices of new build rigs secured. With a tightening rig market, we believe that the opportunities for incrementally better pricing exist.

Maintain BUY. We continue to like Keppel for its offshore exposure, diversified property business and growing infrastructure segment. The 800MW expansion of Keppel Merlimau co-gen plant would commence operations in 1H13. Maintain BUY.

Source: Maybank Kim Eng Research - 19 Oct 2012