Keppel stays resilient

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Keppel Corp has proven that it is still a force to be reckoned with in the rig-building business, even as its rivals continue to encroach on its turf.

A decline in work volume pushed its offshore and marine (O&M) revenue down 15% y-o-y and 0.6% q-o-q to $1.7 billion in 1Q2013. But Keppel's operating profit margin of 14% was the highest in four quarters, indicating an improvement in operational efficiency.

Analysts now expect more upside to margins in the quarters ahead, with some branding Keppel's internal target of 10% to 12% as conservative.

"The company's ability to yet again deliver a sector-leading margin, despite the competitive headwinds faced by the industry, underlines its operational strength and strong outlook," says Barclays, which has an "overweight" call and $13.80 price target on the stock.

The world's biggest rig-builder has secured orders for seven jack-up rigs year to date, but CEO Choo Chiau Beng concedes that contracts for semi-submersibles are "taking time to come through".

Keppel clinched $1.66 billion worth of new contracts in 1Q2013. Its net order book stands at $13.1 billion, which will keep it busy till 2019.

According to Macquarie Capital Securities, any contracts for semi-submersible rigs will be a catalyst for Keppel's share price, which has gained only about 2% so far this year, compared with the Straits Times Index's 4% rise.

"The stock has stopped reacting to order wins as investors have been focusing more on margins and semi-sub orders. We think announcement of a few semi-sub orders will be key for the stock to move from here," says Macquarie, which has a "neutral" recommendation and $11.60 price target.

Keppel inked an agreement last December with energy group Naftogaz of Ukraine to build two semi-submersible rigs worth US$1.2 billion ($1.47 billion). But the deal was called off last month as certain conditions were not met.

While its current order book is healthy, Keppel has to contend with rising competition from Chinese yards and declining oil prices.

Chinese yards have won a total of US$2.3 billion worth of jack-up rigs so far this year, more than the US$2.1 billion clinched by Keppel and Sembcorp Marine, notes OCBC Investment Research. "Should this pace keep up till the end of the year, it will be a significant milestone in the history of Chinese rig-building."

While most of the customers of these Chinese yards are not leading players in the industry, and therefore have riskier credit profiles, the Chinese are still expected to pose "stiff competition as they scale the learning curve over time", says OCBC, which has a "buy" call and $12.68 price target on Keppel.

The recent pullback in oil prices does not bode well for investor sentiment as well. Brent prices have declined by more than 10% this year, although they are still within the level of US$80 to US$100 a barrel that energy companies use as a guide in planning their exploration and production work.

On a group level, Keppel's revenue fell 35.3% y-o-y to $2.76 billion in 1Q2013. Its top line last year was boosted by one-off gains from the sale of homes at its high-end Reflections at Keppel Bay development. As a result, group earnings in 1Q2013 were 52.5% lower at $357 million.

The company does not expect to better its FY2012 results this year as last year's better-than-expected earnings of $2.2 billion, up 15%, were driven partly by sales of its Reflections project.