Yesterday after market close, Keppel Corp reported strong S$406m profit (+17% YoY) in its 2Q14 results, 8% ahead of Macquarie Equities Research (MER) estimates, due to higher revenue recognition from Brazil. According to MER, its quarterly results are just a pulse check on yard stocks. What’s more important is to understand the strategies the companies are adopting for longer term survival in an increasingly competitive environment. Keppel Corp stands out in that regard – with its product and geographical diversification strategy.

O&M margins remain surprisingly very strong: Offshore and marine earnings before interest and tax (EBIT) margin came in at 14.7%. Its first half of 2014 margin of 14.6% is ahead of MER’s 2014 estimate of 13.0%.

Dividend payout increases: Second quarter 2014 interim dividend per share was S$12cents/share, 2cents higher than 2Q13. MER expects S$50cents/share dividend per share in 2014.
 
Significant progress on Brazil orders: The first semi-sub is 70% complete while the second is 30% complete. Keppel Corp has initiated work on the third one too.
 
YTD order inflows S$3.2bn with robust S$14.1bn order book: Keppel Corp is on track to achieve MER S$5.5bn order inflow forecast for 2014.
 
 
What’s ahead
 
Strategy 1: Diversify product line; Global JU demand is slowing down: Global jackup orders have fallen to 30 in first half of 2014 versus 72 in 2013, with most being speculative in nature, placed by asset players to Chinese yards.
 
- New drillship venture is crucial: Keppel Corp’s radical design hasn’t gained traction yet. Keppel Corp is building a drillship without any order yet and hopes to market its design and secure orders over 2014 to 15.
 
- Move to FLNG and other new vessels is as important: Keppel Corp secured its firs FLNG conversion order in second quarter 2014. Diversification to new areas such as FLNG will be key to order sustainability in MER’s view.

- Strategy 2: Diversify geographical reach; Local content in demand: Keppel Corp is one of the most diversified yard companies when it comes to geography. It has yards in US, Brazil, Middle East etc. Its recent ventures into Mexico and China are key to its long term sustainability in MER’s view.

Action and recommendation
Stock is steady for now; catalysts should emerge from 4Q14: Keppel Corp’s stock has moved sideways in first half of 2014. MER expects the capex environment to improve from fourth quarter 2014, driving orders for semisubs and drillships. MER has an Outperform rating on Keppel Corp with a 12-month target price of $13.00.

Source: Macquarie Research - 25 Jul 2014