• Steady core earnings
• Rigs for Sete progressing well
• No infrastructure provisions in 1Q

1Q14 results in line

Keppel Corporation (KEP) reported a 8.6% YoY rise in revenue to S$3b and a 5.1% fall in net profit to S$338.7m in 1Q14, both accounting for about 22% of our full year estimates and in line with expectations. Excluding one-off gains from the reversal of provision from the sale of a power barge and write-back of tax provision made by Keppel Land in 1Q13, net profit in 1Q14 was largely in line with that in 1Q13.

Operations were mostly on track

The O&M segment saw operating margins of 14.6% in 1Q14, or about 14.2% excluding the sale of Berich Enterprises and Keppel Kazakhstan. This is close to the 14.1% margin seen in 1Q13. We also understand that the first and second semi-submersible rigs for Sete Brasil have also reached 60% and 20% revenue recognition, respectively. The lower hull of the first semi has arrived in Angra, Brazil, and construction is “progressing well” for the second and third semis. On the infrastructure side, Keppel Seghers has completed the first burn as part of the commissioning process for Phase 1 of the Greater Manchester Energy-from-Waste plant. As for the challenging Qatar project, no provisions were made in 1Q14 and management hopes for completion by year end.

O&M order momentum to sustain

The O&M division secured S$1.9b of new orders in 1Q14, of which five are jack-up rigs. This is evident of a still strong market for the jack-up rig segment, which is seeing utilization rates close to 100%. The ultradeepwater segment, however, has seen a softening in day rates, but we do note that major oil companies are still encouraging E&P spending due to concerns over reserve replacement ratios. Overall, the ongoing bifurcation towards premium assets and the replacement of old rigs should continue to support order momentum, supported by oil prices which are in a comfortable range. As at end 1Q14, the net orderbook stood at a record S$14.4b with deliveries till 2019. Maintain BUY with S$12.25 fair value estimate.

Source: OCBC Research - 17 Apr 2014