• Still the most established name
• Diversified exposure
• Lowering new order estimates

Oil prices have taken another tumble since last update

During its 3Q14 results briefing around the end of Oct, Keppel mentioned it believed that jitters in the oil market has not altered the sound fundamentals of the industry. With regards to capital expenditure cuts by international oil companies (IOCs), management sees this as “kicking the can down the road” and IOCs will at some point need to spend to replenish reserves, while drilling contractors have to replace their fleet with new, safer and technologically superior rigs. However, oil prices have taken another tumble since then, and with oil price forecasts being cut across the board, we think that order flows are likely to slow even further. Still, at current levels oil prices are still supportive of shallow-water exploration and development activities, which should underpin some rig orders. It is also worth noting that Keppel also has exposure to production-related orders, which should be more resilient should oil prices remain volatile.

Also has exposure to property and infrastructure

We estimate that the offshore & marine division will contribute about 65% of this year’s total net profit, with a quarter from property, and about 10% from infrastructure and investments. Besides positive prospects for Keppel Land, the infrastructure segment also looks poised to benefit from an expected growth in demand for data centres and as well as the larger Keppel Infrastructure Trust.

Lowering new order win assumptions and P/E for O&M segment

With oil prices likely to remain subdued, we lower our new order win assumptions for KEP to S$5b for this year and S$4.5b for 2015, and with the de-rating of the broader sector, we lower our P/E for the O&M segment from, 15x to 13x, such that our fair value estimate is now S$9.89 (prev. S$11.75). However, given the upside potential of more than 10%, we maintain our BUY rating on the stock. Currently, we are still keeping to our dividend forecast of 5.2% for KEP, which should provide a floor to the stock.

Source: OCBC Research - 1 Dec 2014