KEP – More positives than negatives
MER released a research report on Keppel Corporation, dated 17 April, with a ‘Neutral’ rating and a 12-month price target of $11.60. This is a 6.2% upside from KEP’s closing price yesterday. Below are some excerpts from the report.

The Good:
Order inflow much stronger than expected: KEP has won as many as 7 Jackup orders in 2013YTD, resulting in a robust S$2.2bn of order inflows.

O&M margins came in quite strong: KEP reported O&M earnings before interest and tax margin of 14.1% in 1Q13, much higher than MER’s full year estimate of 13.0%. This could be due to higher revenue mix from repair and conversion orders in MER’s view.

2015 yard slots are fast getting filled: KEP has 30 Jackup orders on its books currently, out of which 10 would be delivered in 2015. MER believes that with the addition of few more Jackups and 2-3 Semisub orders, KEP would be able to fill up the yard slots for 2015, which is a very healthy sign.

New power plant boosts infrastructure division profits: Infrastructure division profits doubled to S$55m as one unit of the 800MW expansion of its power plant is operational now. The second unit will be operational in 2Q13.

The Bad:
Steep decline in property business profits, as expected: Property earnings fell 80% YoY due to one-off income from the “Reflections project” in 1Q12. In MER’s view, KEP has returned to normalized property business profits of S$60-80mn per quarter, which should continue in 2013.

WIL – Baby steps into Africa
Like KEP, MER has a ‘Neutral’ recommendation on Wilmar according to its note released on 16 April. Compared to the close yesterday, Wilmar is 2.7% away from MER’s 12 month price target of $3.40.

Event
Wilmar purchased a 27.5% stake purchase in Morocco's Cosumar S.A. for US$263m (11.5x trailing PE) from strategic investor SNI. Cosumar is the sole sugar supplier in Morocco and third largest sugar producer in Africa.

A separate group of investors will also purchase a 26.5% stake from SNI. From Wilmar's perspective, the combined 54% ownership can be seen as a "controlling block". 

Impact
The financial impact from this investment will be small (MER estimates 1% EPS accretive for 2013). The deal is relevant, however, as it encapsulates two of management's planned growth avenues: Africa and sugar. 

Wilmar's press release talks about Cosumar acting as a platform from which Wilmar can expand its sugar operations in Africa and Southern Europe. To do this, Wilmar will leverage Cosumar's surplus capacity at its 1.6m ton port based refinery in Casablanca.

MER’s Action and recommendation
MER thinks that it will have to wait and see if this investment presages bigger moves by Wilmar into Africa/sugar in the future. In the meantime, the shares look fairly valued to MER.

Source: Macquarie Research - 25 Apr 2013