Keppel Corp Full Year 08 Results

Keppel Corp

Jan 28 close: $4.18

DMG & Partners Securities, Jan 23

FY08 earnings in line with market expectation:
Keppel Corporation reported record FY08 revenue of $11.8 billion (+13.2 per cent year-on-year) aided by higher contributions from O&M and Infrastructure divisions. Core recurring FY08 profit after tax and minority interest (Patmi) of $1.1 billion (+6.9 per cent y-o-y) was in line with the market consensus' estimates of $1.07 billion. While Keppel's FY08 results were credible, total distribution of 35 cents/share declared was slightly disappointing. This implied a gross dividend payout of 51 per cent - the lowest in five years - and at the lower end of management's guidance of 50-60 per cent.

O&M to face headwinds:
O&M's FY08 revenue of $8.6 billion (+18 per cent y-o-y) accounted for 73 per cent of Keppel's revenue, while O&M's FY08 Patmi of $705 million (+35 per cent y-o-y) contributed to 64 per cent of Keppel's Patmi as the division saw the successful completion of 13 jack-ups and three semis. Having current backlog orders of $10.8 billion, the management maintained that the yards would still be busy, with 10 jack-ups and six semis stipulated for delivery in FY09. However, we reiterate our cautious stance on the O&M sector, and opine any significant newbuild contract to occur only in H209 soonest. Our FY09 and FY10 new order estimates stay at $2.2 billion and $2.6 billion respectively.

Not time for a 'buy' yet, downside risks persist:
We advocate that it is still too early to turn buyers on this counter. Downside risks persist, including potential orderbook cancellations and sustained period of depressed oil price. However, we are comforted that Keppel's improved ROE of 22.4 per cent, strong free cash flow of $1.9 billion and net cash position of 0.04x will strengthen Keppel's ability to weather through this crisis.

Our recommendation stays at 'neutral', with a revised TP of $4.48 (from $4.53 previously) due to DMG's revised TP of $1.80 (from $2 previously) for Keppel Land and updated market values for the listed entities. NEUTRAL