Keppel Corporation (KEP) traded towards $11 yesterday but failed to close above the level and ended the day at $10.98 (+0.6%). Despite the rally in the shares, KEP share price is still 10.4% away from Macquarie’s Equities Research’s (MER) 12-month target price of $12.25. Last Thursday, KEP announced that they won a US$1.1 billion order from Transocean to build 5 Jack-up rigs. Shortly after, MER released a research note with an ‘Outperform’ rating on the stock.

Impact
US$2.2bn order in effect; Half has been kept as "option": Transocean has placed orders for 10 rigs but signed contract for 5 orders and kept the other 5 as "options" which could be signed next year. In large contract signings, this is typically the modus operandi.
 
KEP beat heavy competition to get this order: KEP beat competition from its Singapore peer, the Chinese shipyards and the Korean counterparts. There was very strong competition from all yards for these large and lucrative orders. MER’s discussions with industry experts suggested that Chinese shipyards were offering lucrative financing terms.
 
This order is a testimony to KEP's superior Jack-up design: KEP's "KFELS B Class" Jack-up design appears to be the most preferred design globally. KEP has received 18 Jack-up orders this year of the same design and has delivered around 50 Jack-ups in the last few years.
 
Forging a partnership with "Transocean" would be good for KEP: Transocean is the world's largest contractor/driller in terms of the rig fleet size. It is coming back to the market to order new rigs and refurbish its fleet. Forging a partnership with the No.1 driller is a good sign for KEP.
 
S$6.8bn of new orders in 2013YTD; Above MER’s full year estimate:  KEP has now received 18 Jackups and 1 Semisub order in 2013YTD, much higher than MER’s S$6bn estimate for the full year.
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MER’s action and recommendation
Estimates need to be increased again; stock deserves credit for continuously surprising the market:  KEP's 3Q13 results were robust. In addition, company has now beaten all street estimates on order inflows for 2013.
 
Property trading prop KEP’s earnings
In a separate note, KEP announced 3Q profits which soared 32% mainly due to contributions from its property trading segment. Keppel Land, the group’s property unit announced a 70% rise in profits helped by the completion of more projects in China.
 
After the O&M company declared its results, its shares jumped 0.6% on 18^th October.

Source: Macquarie Research - 12 Nov 2013