Keppel Corporation (KEP) reported a 22% decline in profits in its 4Q12 results in line with estimates yesterday and Macquarie Equities Research (MER) released a research report shortly after. MER has a ‘Neutral’ recommendation on the counter with a 12 month price target of $11.60. KEP closed at $11.34, a 0.4% gain day on day.

Full year 2012 profit was up 28% due to large income from a property project. 2012 also saw KEP winning its highest ever amount of rig order inflows.

The Good:
Robust 28% full year profit growth driven by “Reflections” property project: MER estimates KEP recorded profit of ~$400m from Reflections. Ex this project while group profit came in at +2% YoY in 2012.
Dividend per share of 72 cents vs 43 cents in 2011 driven by special dividend in specie: KEP has announced a special dividend in specie of 1 KREIT unit for every 5 shares in KEP. This amounts to 27 cents/share of special dividend. KEP owns 31.4% of KREIT and will thus reduce its KREIT ownership by 13.7%.

The Bad:
Weakest quarterly profit in last 8 quarters: $305m of profits is low but on expected lines as property income has normalized post sale of Reflections’ units while infrastructure division reported losses of $72m.

Looking forward:
$4.5bn of annual orders priced in; anything more could be a catalyst: MER thinks KEP should be able to win around 5 Jackups, 3 Semi-subs and $1bn of conversion/FPSO jobs in 2013. Any surprise orders from Petrobras or higher Semi-sub orders could be a catalyst for the stock price.
2013 profits will fall sharply due to property; O&M margins will be closely watched: MER thinks KEP’s group earnings will fall by an 8% compounded annual growth rate over 2012-15E due to a decline in property earnings. On the O&M side, MER has built in a 13.0% EBIT margin in 2013 and 12.4% in 2014 (vs 13.5% in 2012).

MER’s action and recommendation
Neutral; recommend the stock for long-term investors: At ~14x 2013E price to earnings, KEP is trading at par with SMM (SMM SP, OP, $4.79, TP:$5.80). MER prefers SMM in the near term given its higher earnings growth trajectory (15% for SMM vs -8% for KEP). However, over a longer 3-5 year horizon, MER thinks that KEP, as a top-5 rig builder globally, is a key beneficiary of the rig building cycle and one of the best stocks to hold in Singapore.

Source: Macquarie Equities Research - 25 Jan 2013