Lower contract wins for Keppel in the next two years

UOB forecasts a mere S$4billion per year for the group as an economic slowdown is just around the corner.

And Keppel’s current net O&M orderbook currently stands at S$9b, which is still below its peak of S$13.0b in 3Q08.

Here’s more from UOB:

A bumper year. 2011 has been a tremendous year for Keppel with strong contract wins totalling S$8.7b ytd. This is a new record. Keppel is on track to meet our 2011 contract win forecast of S$10b. Keppel’s current net O&M orderbook currently stands at S$9b with deliveries extending into 2014.

However, this is still below the peak orderbook of S$13.0b in 3Q08. Keppel’s current orderbook has secured a comfortable level of O&M earnings for the next two years. In view of 2011’s bumper harvest and an economic slowdown just round the corner, we forecast lower contract wins for 2012 and 2013 at S$4b per year.

Semi orders the next wave. While jack-up rig enquiries are down substantially given the strong amount of orders since 4Q10, there are active enquiries for semi-submersible rigs. At a recent company visit, management indicated active enquiries for semis from rig contractors for the North Sea area. Rig replacement is one of the factors that induce new demand.

We estimate the value of a new semi at US$550m-600m apiece. While the number of semi orders would not mirror that for jack-ups, the value of a semi is typically 2.5-3.0x higher than a jack-up rig’s.

Well placed for a slice of Brazil’s E&P spending. Brazil is back on the radar screen with bidding for the 21-rig tender by rig contractors having just ended. With two operational yards in Brazil, Keppel is well placed to secure contracts. Keppel has submitted bids for six rigs which could add US$4b to its orderbook. According to Petrobras CEO Mr Gabrielli, the winners of the tender could be announced by end-11.

Maintain BUY. With our target price of S$9.60, there is an upside of 7% upside in share price. Given that Keppel’s share price has a large trading range amid the current market volatility, there should be opportunities to accumulate the stock at lower levels.

Our target price is based on 12x 2012F PE - the long-term PE mean for a pure offshore heavy engineering shipyard such as SMM - for Keppel’s shipyard business. In the last oil cycle, valuations reached a peak 1-year PE of 19x in 2005. Trough valuation in 2009 was 3x.

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