Event
Keppel Corp has surprised one and all with the volume and quality of orders in 2013 year-to-date (S$7.1bn orders won versus S$5bn street estimates at start of 2013). Acknowledging Keppel Corp’s dominance of the jack-up market and new venture into drillships, MER is increasing their order inflow, profit and target price estimates.
 
After 30% total return in 2012, Keppel Corp’s stock has delivered another 9% return 2013 year-to-date (versus +1% for the index). Driven by order inflow momentum, MER expects the upgrade cycle to continue and the stock to deliver another 20% return over the next 12 months.
 
 
Giving credit where it’s due
MER is increasing their 2013 order inflow to S$7.6bn from S$6bn earlier. This is a remarkable 66% YoY jump in orders (ex-Petrobras). As many as 19 jackups, 1 semi-sub and 1 floatel orders are in the bag in 2013 year-to-date
 
MER is also increasing their 2014 estimated order inflow to S$6bn from S$5bn earlier. MER believes S$1.4bn is already in the bag for KEP in 2014 as Transocean will convert the 5 jack-up options. MER also expects first drillship orders for Keppel Corp in 2014.
 
 
Catalysts for 2014:
Robust order book of S$15bn to drive strong profit growth:This is the largest ever order book for KEP, a 17% growth on 2012-end order book, and would drive a significant 18% profit growth over 2013-15, in MER’s  view.
 
Big surprise in 2014 could be drillship orders for the first time: MER expects KEP to bag its first drillship orders in 2014, as its new design, which seems to be a vast improvement over the Korean design, gains traction.
 
King of jackups should continue dominating: KEP’s jack-up design is most preferred globally now with KEP winning 52 / 160 jack-up orders placed since 2010 (33% market share). MER expects the trend to continue in 2014.
 
Property business profits could continue surprising: China residential sales surprised positively this year. Any momentum could lead to upgrades.
 
 
MER has 12-month price target of $13 on Keppel Corp
MER sees Keppel Corp as a rare large cap stock on an upgrade cycle in Singapore which at  11x 2015 price-earnings ratio, does not look expensive.
 
MER’s 2015 estimate is 6% above consensus. New orders will lead to further street upgrades while a 4-5% dividend yield provides additional cushion, in MER’s view.
 
MER has an Outperform rating on Keppel Corp with a 12-month target price of $13, 16.8% higher than its closing price of $11.13 yesterday.

Source: Macquarie Research - 5 Dec 2013