Global Research 22 October 2014 Keppel Corporation Equities Dissecting the order book Singapore Industrial, Diversified Weak oil price raises scrutiny on order book and replenishment rate Keppel needs to win ~S$6bn (US$4.7bn) new orders annually to replenish order books, including deliveries from Brazil. At its Q314 results briefing, Keppel guided that enquiries for drilling, production and support vessels remain strong. The stock market is however less sanguine because the S$6bn hurdle, while not impossible, is a high bar, and concerns surrounding global growth add uncertainty. On this issue, we believe: (1) Keppel's order book should perk up soon, as it is in advanced negotiations with a number of customers and partners. (2) At the same time, we share the market's concerns that the pace of new orders is slowing. A complete halt in order momentum is unlikely. But Kep's customers might place orders at a more leisurely pace, even though they need solutions, if yard slots are not being booked up quickly. A closer look at order book: Customer and product diversity helps In this report we dissect Keppel's order book to explain our view that product and customer diversity helps tide the group through choppy waters. For instance, orders from customers with close government links form around 30% of orders annually. A strong jack up market plays into the niche that Keppel is strongest in, but this is not its only source of orders. The company expects its MOU with Pemex to materialise into a firm contract in early 2015; this adds 6 jack ups (S$1.8bn orders) to its book. Keppel also expects a job with Golar for an FLNGV by end 2014 (we est value US$735m). Dividend outlook unchanged post Q314 results, implies 4.4% yield Keppel has typically paid 50% of its earnings in dividends and management indicated that this would be maintained, "barring unforeseen circumstances". Q314 earnings were in line with ests, with M914 net profit at 75% of our full year forecast. 12-month rating Buy 12m price target S$11.02 Prior: S$12.85 Price S$9.70 RIC: KPLM.SI BBG: KEP SP Trading data and key metrics 52-wk range S$11.33-9.46 Market cap. Profitability/valuation EBIT margin % ROIC (EBIT) % EV/EBITDA (core) x P/E (UBS, diluted) x Equity FCF (UBS) yield % Net dividend yield % 1,806m (ORD) Free float 78% Avg. daily volume ('000) 3,410 Avg. daily value (m) S$35.5 Common s/h equity (12/14E) S$10.5bn P/BV (12/14E) 1.7x Net debt / EBITDA (12/14E) 0.7x EPS (UBS, diluted) (S$) UBS 0.85 12/14E 0.90 12/15E 0.92 12/16E Cons. 0.86 0.92 0.98 Cheryl Lee, CFA Analyst [email protected] +65-6495 5914 Valuation: based on sum of parts, price target cut to S$11.02 from S$12.85 Our sum of parts valuation has not changed significantly as we maintain our earnings estimates. However, macro-driven uncertainty has risen and the risk of project delays and order book falling short of our ests has increased, as we head towards 2015. We believe a 10% discount to SOTP valuation is valid and trim our price target accordingly. Highlights (S$m) Revenues EBIT (UBS) Net earnings (UBS) EPS (UBS, diluted) (S$) DPS (S$) Net (debt) / cash S$17.5bn/US$13.9bn Shares o/s 12/11 9,963 1,778 1,491 0.84 0.43 (1,279) 12/12 13,965 2,621 1,914 1.06 0.45 (2,736) 12/13 12,380 1,701 1,412 0.78 0.40 (1,090) 12/14E 13,123 1,532 1,542 0.85 0.43 (1,305) 12/15E 14,159 1,633 1,627 0.90 0.45 (978) 12/16E 14,507 1,628 1,645 0.92 0.45 (1,387) 12/17E 14,605 1,594 1,636 0.92 0.45 (1,770) 12/18E 14,682 1,699 1,647 0.93 0.46 (2,038) 12/11 17.8 28.2 8.8 12.1 (7.9) 4.3 12/12 18.8 28.0 7.1 10.1 0.1 4.2 12/13 13.7 17.1 10.2 14.0 (3.8) 3.7 12/14E 11.7 16.3 9.3 11.4 2.5 4.4 12/15E 11.5 16.7 8.6 10.8 5.7 4.6 12/16E 11.2 15.8 8.4 10.5 1.7 4.7 12/17E 10.9 14.4 8.3 10.5 1.8 4.7 12/18E 11.6 14.4 7.6 10.5 2.4 4.7 Source: Company accounts, Thomson Reuters, UBS estimates. Metrics marked as (UBS) have had analyst adjustments applied. Valuations: based on an average share price that year, (E): based on a share price of S$9.70 on 22 Oct 2014 22:26 HKT www.ubs.com/investmentresearch This report has been prepared by UBS Securities Pte. Ltd. (Reg. No. 198500648C). ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 16. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Keppel's share price corrected sharply below the apparent psychological support level of S$10, following concerns about global growth, potential cut in capex by oil majors, bearish comments by Saudi representatives on oil prices. Other stocks associated with offshore oil & gas have come under intensive selling pressure as well. 27 November is a key date, as this is the next scheduled OPEC meeting. 9.0 Source: Bloomberg, UBS Oct-14 Sep-14 Aug-14 Jul-14 Jun-14 May-14 Apr-14 Mar-14 Feb-14 Jan-14 2,700 9.5 70 60 9.0 Oct-14 2,800 80 Keppel (S$, LHS) Sep-14 2,900 9.5 90 10.0 Aug-14 3,000 100 10.5 Jul-14 3,100 10.0 110 Jun-14 3,200 10.5 11.0 May-14 3,300 120 Apr-14 3,400 11.0 11.5 Mar-14 3,500 Keppel (LHS) Feb-14 11.5 Figure 2: Keppel share price performance vs Brent Crude Jan-14 Figure 1: Keppel share price performance vs FSSTI Source: Bloomberg, UBS Although an environment of sustained low oil prices places the economics of some higher cost projects at risk, it is unrealistic to assume that all E&P activity, and consequently orders to shipyards, to come to a halt. Of late, we have been asked frequently whether the fall in oil prices mean all 'deep water' projects are at risk. We highlight that water depth is only one aspect of a field's economics. While some projects in deepwater West Africa and shallow water North Sea could be affected, we believe projects in ultra deepwater Brazil are not because of the large reserves. Outside of drilling and production units, rejuvenation of support vessels is still ongoing. Meanwhile, Pemex continues to forge ahead with its E&P programme and production growth targets: Recent legislation allows the private sector to participate in Mexico's energy market. Order book outlook Keppel needs to secure around S$6bn (US$4.7bn) of new orders annually to replenish the order book drawn down, including what is being delivered out of Brazil. The company, when asked about order book prospects, remains very sanguine. At its Q314 briefing, Keppel continued to guide that enquiries for drilling, production and support vessels remains strong and the company remains as optimistic as ever about being able to replenish order book. (Keppel as a matter of policy does not guide on the potential annual value of order wins.) The stock market is significantly less optimistic than Keppel on order book prospects. The S$6bn hurdle, while not impossible, is a high bar, made more difficult by the volatile macro situation (and ongoing concerns on global demand and global growth). We expect Keppel to continue converting enquiries to firm orders. At the same time, we share the market's concerns that the pace of new orders is slowing. Even if shipyard customers remain in need of solutions, there is less urgency to get orders placed, especially if slots are not getting booked up quickly, and delays to oil major's production plans are anticipated. For this reason, we have trimmed our Keppel Corporation 22 October 2014 2 price target. Even though we have not significantly cut earnings estimates and valuation, we believe the market will seek a wider discount to Keppel's Sum of parts valuation. This is discussed in a later section in this report. As mentioned, in the near term, we expect Keppel to continue winning orders. The group is in advanced discussion for a number of large orders. Significant order book drivers include: 1) MOU with Pemex. Negotiations between Keppel and Pemex to set up a shipyard in Mexico are at an advanced stage. The shareholders' agreement, which is likely to be signed in Q115, will include a contract to construct six jack up rigs. Keppel's capex commitment for the first phase of yard development is US$150m, which in our view is not excessive. (Keppel's capex over 2012-13 was approx. US$280m/year) Construction of the six jack ups rigs can commence shortly after the agreement is inked. Local content on the first rig is 25%; thus the construction will start in Singapore, with final assembly in Mexico. We estimate the contract for the six rigs would amount to about US$1,440m (S$1.8bn). Mexico has announced its intention to spend US$20-30bn on capex annually over the next five years, and aims to lift production from 2.4mb/d currently to 3.0mb/d by 2018. Thus, we expect this JV to achieve more than the initial order of six jack ups. 2) Golar LNG Letter of Intent. Keppel has signed a letter of intent with Golar LNG to perform the conversion of a second Moss LNG carrier into a floating liquefaction vessel (FLNGV). Keppel expects to ink a firm contract by the end of 2014. The work scope is similar to the first; and if so the potential value of this is around US$735m (S$933m). In the future, Keppel targets 2 FLNG conversions annually. 3) Agreement with Titan Petrochemicals to manage shipyard in Fujian, China. The deal is conditional on completion of the ongoing financial restructuring of the Titan Petrochemicals Group. Progress has been made since the agreement was announced in April. This deal opens the door to China's large but closed Offshore market. (Link to note: Titan Shipyard Note pubished April 2014) 4) Ongoing discussions with State owned enterprise SOCAR of Azerbaijan for a second drilling semisubmersible. Keppel has indicated that this is a possibility but the parties have not come to agreement on terms. The first unit was priced at US$800m. Keppel continues to entertain enquiries on Floatels (US$200-300m/unit). Keppel Corporation 22 October 2014 3 Order book dissected The following charts provide snapshots of Keppel's order book, broken down in different ways. We provide both a snapshot of the net order book – ie orders to be delivered over 2015-2016, as well as a year- by-year breakdown. We have dissected the order book according to: (a) Profile of client: Private company vs government linked company. (b) Type of vessel (Jack up, semisubs, drillships, gas vessels) (c) Water depth and activity (drilling, production ). The key takeaway from these charts is that the company has typically sourced its orders from a wide range of sources. A strong jack up market plays into the niche that Keppel is strongest in, but this is not its only source of orders. Meanwhile, we observe that contracts from companies which are state owned, or which have close government links, are significant contributors to order books each year. This trend is unchanged, despite the sharp correction in crude oil prices in recent weeks. Client profile – Private ownership vs state owned Figure 3: Composition of order book wins/ yr by profile of customer (%) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2010 2011 2012 State owned or strong govt links 2013 2014 Private corporates Source: Company, UBS Figure 4: Net order book – Revenue source by profile of customer (%) Private corporates 42% State owned or strong govt links 58% Source: Company, UBS Keppel Corporation 22 October 2014 4 Type of vessel Figure 5: Composition of net order book by type of vessel (End 2014) FPSO 4% Gas 6% Support vessel Semisub & others 6% 1% Jack up 43% Semisub-Brazil 40% Source: Company, UBS Figure 6: % contribution of order wins/year by type of vessel (%) 100% 80% 60% 40% 20% 0% -20% -40% 2005 Jackup 2006 2007 Drilling semi Gas 2008 Floatel OSV 2009 Drillship 2010 2011 2012 2013 2014 Tender FPSO Production Others Cancelled Source: Company, UBS Figure 7: Value of order wins/year by type of vessel (S$m) 12000 10000 8000 6000 4000 2000 0 -2000 2005 Jackup 2006 Drilling semi 2007 Gas 2008 Floatel OSV 2009 Drillship 2010 Tender 2011 FPSO 2012 Production Others 2013 2014 Cancelled Source: Company, UBS Keppel Corporation 22 October 2014 5 Water depth & activity type Figure 8: Composition of net order book by water depth & activity (End 2014) LNG 6% Production Deepwater 6% Support vessel & others 1% Drilling Shallow water 43% Drilling Deepwater 44% Source: Company, UBS Figure 9: % contribution of order wins/year by water depth and activity type (%) 100% 80% 60% 40% 20% 0% -20% -40% 2005 2006 Drilling - Shallow water 2007 2008 Drilling - Deepwater 2009 2010 2011 Production - Deepwater 2012 LNG 2013 Support vessel 2014 Others Source: Company, UBS Figure 10: Value of order wins/year by water depth and activity type (S$m) 12000 10000 8000 6000 4000 2000 0 -2000 2005 2006 Drilling - Shallow water 2007 2008 Drilling - Deepwater 2009 2010 2011 Production - Deepwater LNG 2012 2013 Support vessel 2014 Others Source: Company, UBS Keppel Corporation 22 October 2014 6 Figure 11: Deepwater production units and Floatels : Post shipyard destination details Production water depth Contract date Delivery year Customer Product Field Aug-12 2015 Floatel Intl Accomo semi Wheatstone (North West Shelf) 130 397 Aug-13 2015 Floatel Intl Accomo semi Ichthys 250 357 Mar-14 2015 SOFEC FPSO Tweneboa-Enyenra-Ntomme 1,500 65 Jul-14 2015 Bumi Armada FPSO Kraken (UK North Sea) 120 184 Feb-13 2015 Modec/ Toyo FPSO Carioca 2,100 150 Aug-12 2015 TBD Petrobras FPSO Sapinhoa 3,000 591 Aug-12 2016 TBD Petrobras FPSO Lula 2,000 591 (metres) Est shipyard value S$m Source: Company, UBS Default, cancellation and write-off risk. The quality of Keppel's order book is high, in our view, in terms of customer profile and the types of designs being built. Orders for production platforms relate to projects already green-lit. Newbuild orders are largely for Keppel's flagship KFELS rig designs, which are well known by the market, and there have not been significant delays attributed to the shipyard. In a 'worst case' scenario of a customer default, Keppel has received 20% downpayment, and in our view should be able to find an alternate buyer for 80% of the original contract price. Valuation Offshore division We assume that Keppel will secure S$5.5-6.0bn (US$4.3-4.7bn) new orders annually over 2014 to 2016. Q314 EBIT margin was close to 15%. We believe these are not excessive; and that Keppel continues to stack up favourably versus its competitors in the trade off between execution capability and lowest cost. In the forecast period, EBIT margins remain around 14% on average each year. Longer term, we adopt a pragmatic view of the industry and our valuation assumes a sharp decline in revenue from year 6, as we assume that orders decline alongside a weaker cycle. Our terminal valuation for the Offshore business is based off a 2025E recurring order book of S$2.8bn (US$2.2m) on 8% EBIT margin (M914: EBIT margin 14.7%, Pretax margin 16.3%). We discount Keppel's FCF by 5.6% WACC (COE 8.8%) in our valuation. Sensitivity: If terminal margins were 100bps lower than our forecast of 8%, how does this change valuations? In this scenario, we estimate that every 100bps change in long term margin assumption results in a 8.5% cut to 2025E Offshore earnings, and S$0.48/share cut to valuation. Keppel Corporation 22 October 2014 7 Group valuation Figure 12: Keppel Corp 1-yr forward PE valuation Figure 13: Keppel Corp 1-yr forward PBV valuation Current P/E(x): 10.88; Mean: 11.4; -1STD: 8.59; +1STD: 14.21 35 Current P/BV (x): 1.57; Mean: 2.08; -1STD: 1.32; +1STD: 2.83 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 30 25 20 15 10 5 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 0 Source: UBS estimates Source: UBS estimates Keppel Corp currently trades on a valuation of 10.9x 1-year forward earnings and 1.6x price to book value. We believe that the P/BV valuation is justified by Keppel's 15% ROE vs its COE of 7.5%. Consensus EPS momentum has been weak since the start of the year, but we think that the decent Q3 results should arrest the trend. Figure 14: Keppel Corp Consensus EPS estimates 1.10 FY14 FY15 FY16 1.05 1.00 0.95 0.90 Oct-14 Sep-14 Aug-14 Jul-14 Jun-14 May-14 Apr-14 Mar-14 Jan-14 Feb-14 Dec-13 Nov-13 Oct-13 Sep-13 Jul-13 Aug-13 Jun-13 Apr-13 May-13 Feb-13 Mar-13 Jan-13 0.85 Source: Bloomberg Dividend support continues. Dividends should continue to provide support to share price. Keppel has typically paid 50% of its earnings in dividends and we see little reason for change in the coming years. Group net gearing is low, at around 19%; most of the debt relates to 54% owned subsidiary Keppel Land. Management indicated that the payment rate would be maintained this year, "barring unforeseen circumstances". We forecast dividend of S$0.42, which translates to a yield of 4.3%. Cutting price target to S$11.02 from S$12.85. Our sum of parts valuation has not changed significantly as our earnings estimates have been maintained. However, we note that uncertainty relating to the order book has risen and the risk of project delays and order book falling short of our estimates has increased in our view, as we head towards 2015. We believe it is appropriate to apply a discount to Keppel's sum of parts valuation to set our price target, and believe a 10% discount to RNAV is valid. Accordingly, we cut our price target from S$12.85 to S$11.02. Keppel Corporation 22 October 2014 8 Figure 15: SOTP Business / Details Value (S$ m) Basis 15,133 DCF assuming S$6bn orders 2014-16, lower LT rev and margins fr 2019 2,709 Market price Offshore and Shiprepair Keppel Land K-Reit 4 Market price 594 Project at NAV & capital gain to KepCorp Tianjin eco city 434 Estimate of project NAV to Keppel Corp excluding Keppel Land share Keppel T&T 740 Market price; M1 stake held through KPTT 1,252 Cogen plant, Incineration, other power assets, KIE, KGT 142 Market valuation Harbour project Infrastructure K1 Ventures Dyna-Mac Holdings KrisEnergy Others Total firm value 95 Market valuation 253 Market valuation 400 Estimated book value 21,757 Add: Parent cash / (debt) 500 Total equity value Cash held directly by Keppel Corp excluding est net customer deposits 22,257 Number of shares (m) 1,817 SOTP per share value (S$) 12.25 Price target at 10% discount to SOTP value 11.02 Source: UBS estimates The Singapore market trades on a 1 year forward PE of 13.0x, or about 6% below its 13.8x mean. Meanwhile, 2014/2015E market EPS has been cut by around 1.7%/4.3% since the start of the year and we believe pace of downgrades has slowed. We think our price target implying 14% upside from the 21 Oct 2014 close of S$9.70 looks fair, in this respect. Figure 16: Singapore market valuations MSCI 1-yr forward (x) 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 MSCI SINGAPORE - 12MTH FWD P/BPS +1SD = 1.8 Jul-14 Jan-14 Jul-13 Jan-13 Jul-12 Jan-12 Jul-11 Jul-10 MEAN = 1.6 Jan-11 Jul-09 Jan-10 Jul-08 Jan-09 Jul-07 Jan-08 Jul-06 Jan-07 Jul-05 Jan-06 Jul-04 Jan-05 Jan-04 0.8 -1SD = 1.3 Source: UBS Quantitative Research, MSCI, IBES estimates Keppel Corporation 22 October 2014 9 Figure 17: MSCI Singapore Change in 2014E EPS consensus estimates (Jan 2013 = 100) Figure 18: MSCI Singapore Change in 2015E EPS consensus estimates (Jan 2013 = 100) 102 100 98 96 94 92 90 MSCI consensus 88 EPS estimates 86 (Jan 2013 = 100) 84 105 Source: MSCI, IBES, UBS Quantitative Research Keppel Corporation 22 October 2014 Singapore - EPS15 100 95 90 85 80 75 MSCI consensus EPS estimates (Jan 2013 = 100) Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Singapore -EPS14 Source: MSCI, IBES, UBS Quantitative Research 10 Figure 19: Q314 results summary and highlights YE 31 Dec S$m Q312 Q412 Q113 Q213 Q313 Q413 Q114 Q214 Q314 Comments on current & previous quarters Revenue 3219 2999 2759 3076 2947 3599 2996 3176 3185 Offshore 2223 1711 1702 1818 1536 2071 1919 2061 2199 Q314: Non ord bk revenue was S$338m (LT ave: S$365m); S$1.86bn of order book drawn down; high vs previous quarters.. Infra 680 715 757 850 877 975 736 761 762 Property 305 560 298 400 532 538 330 348 218 10 13 2 8 3 14 12 6 5 Operating profit 433 633 397 423 568 746 415 467 565 Offshore 287 232 239 257 253 310 280 303 329 Q314: 1st/2nd/3rd semisub for Sete Brazil is 75% / 30% / close Invts to 20% completed. Q114: Operating profit includes S$6.9m gains from sale of Kazakhstan shipyard. Q413: Included S$16m provision writeback. Infra 23 -48 65 48 46 -90 48 56 57 Q314: Doha North on track to complete next year. No additional provisions. Q413: Large provisions on Qatar and UK projects. Size of provisions not disclosed, but mgt notes "cogen performed very well", which suggests provisions of at least S$150m. Q412: Provisions on 2 EPC projects, we est ~S$100m in total: Doha North Sewage Treatment Works at Qatar (Challenging conditions) and Greater Manchester energy from waste project (delays). Property 118 438 76 118 263 524 88 81 -3 12 10 5 -1 10 -1 28 Net profit excl EI 337 305 331 347 403 332 339 406 414 Q314: M914 net profit is 75% of our full year expectations. Offshore 241 212 208 237 215 270 230 271 252 Q314: No major one-off items. 3rd Sete Brazil unit and Golar LNG Invts 155 Q314: S$60m divestment gains from equity plaza. 24 Q314: S$23m writeback. Offshore better than expected, property weaker than expected. unit likely to commence initial recognition in Q413. Pemex contract expected in Early 2015. Q114: Includes S$6.9m from sale of Kazakhstan shipyard. Associate income fell, as prev Qs included contributions from FloaTEC JV, from variation orders on P-61 job. Q413: Excl S$15m provision writebacks following subsidiary sale. Infra 14 -72 27 36 34 -111 32 35 38 Q314: No new comments Property 62 154 81 66 139 156 62 67 92 Link to Keppel Land Q314 report Invts 20 12 15 7 15 17 14 33 33 Q314: S$23m impairment writeback from previously impaired K1 Ventures invt. "Continuation" of writeback from Q214. Q214: S$20.9m impairment writebacks. Offshore Op margin 12.9% 13.5% 14.1% 14.2% 16.5% 14.9% 14.6% 14.7% 14.9% 2014E: 14.2% 2013:14.9%; 2012: 13.7%; 2011:23.1% Order book 13070 12824 13135 13056 13649 14236 14385 14082 12691 Q314: Pemex agreement in early 2015. 6 jack ups: Initial construction in Singapore. 2nd Golar FLNG unit: LOI received, hope to ink formal agreement by year end. Open to taking a small stake but nothing is determined yet. SOCAR remains interested in semi rig. 7 options outstanding. Q114: SOCAR is keen on another semi, but KEP wants a clear understanding of rig specifications before proceeding. Q113: Options for Naftoghaz not exercised as Board did not like terms. Source: Company data and UBS Keppel Corporation 22 October 2014 11 Keppel Corporation 22 October 2014 12 Keppel Corporation (KPLM.SI) 12/11 9,963 3,690 1,986 (209) 1,778 264 0 16 1,135 3,193 (641) 2,553 0 (832) 0 1,721 1,491 0.0 12/12 13,965 4,399 2,832 (211) 2,621 286 0 26 323 3,256 (501) 2,756 0 (518) 0 2,237 1,914 15.4 12/13 12,380 3,785 1,943 (242) 1,701 640 0 19 434 2,794 (397) 2,396 0 (551) 0 1,846 1,412 14.2 12/14E 13,123 3,378 1,781 (250) 1,532 603 0 16 0 2,150 (431) 1,719 0 (178) 0 1,542 1,542 20.0 % ch 6.0 12/11 0.84 0.97 0.84 0.43 0.96 4.15 1,778.59 12/12 1.06 1.24 1.06 0.45 1.18 5.16 1,797.61 12/13 0.78 1.02 0.78 0.40 0.91 5.37 1,807.97 12/14E 0.85 0.85 0.85 0.43 0.99 5.80 1,807.97 % ch Balance sheet (S$m) Cash and equivalents Other current assets Total current assets Net tangible fixed assets Net intangible fixed assets Investments / other assets Total assets Trade payables & other ST liabilities Short term debt Total current liabilities Long term debt Other long term liabilities Preferred shares Total liabilities (incl pref shares) Common s/h equity Minority interests Total liabilities & equity 12/11 3,598 8,651 12,249 2,716 0 9,519 24,483 7,808 808 8,616 4,069 607 0 13,292 7,390 3,801 24,483 12/12 4,472 10,134 14,607 3,337 0 11,226 29,171 8,059 1,006 9,064 6,202 326 0 15,592 9,246 4,332 29,171 12/13 6,010 11,948 17,957 3,798 0 8,300 30,056 8,825 517 9,342 6,583 442 0 16,367 9,701 3,988 30,056 12/14E 5,795 11,887 17,683 4,549 0 8,615 30,846 8,796 517 9,313 6,583 475 0 16,372 10,484 3,991 30,846 % ch Cash flow (S$m) Net income (before pref divs) Depreciation & amortisation Net change in working capital Other operating Operating cash flow Tangible capital expenditure Intangible capital expenditure Net (acquisitions) / disposals Other investing Investing cash flow Equity dividends paid Share issues / (buybacks) Other financing Change in debt & pref shares Financing cash flow Cash flow inc/(dec) in cash FX / non cash items Balance sheet inc/(dec) in cash 12/11 1,721 209 (2,290) (246) (607) (802) 0 (205) (248) (1,255) (724) 99 333 (1,185) 12/12 2,237 211 (1,621) 0 827 (801) 0 (60) (209) (1,069) (789) 82 (346) 874 12/13 1,846 242 (732) (1,207) 150 (903) 0 638 (205) (471) (669) 40 2,133 1,537 12/14E 1,542 250 32 (378) 1,446 (1,000) 0 0 274 (726) (759) 0 (175) (214) % ch Income statement (S$m) Revenues Gross profit EBITDA (UBS) Depreciation & amortisation EBIT (UBS) Associates & investment income Other non-operating income Net interest Exceptionals (incl goodwill) Profit before tax Tax Profit after tax Preference dividends Minorities Extraordinary items Net earnings (local GAAP) Net earnings (UBS) Tax rate (%) Per share (S$) EPS (UBS, diluted) EPS (local GAAP, diluted) EPS (UBS, basic) Net DPS (S$) Cash EPS (UBS, diluted)1 Book value per share Average shares (diluted) -10.8 -8.3 3.0 -9.9 -5.8 -19.5 - -23.0 -8.4 -28.3 67.7 - -16.5 9.2 40.9 9.2 -16.5 9.2 6.6 8.3 8.0 0.0 -3.6 -0.5 -1.5 19.8 3.8 2.6 -0.3 0.00 -0.3 0.0 7.6 - 0.0 8.1 0.1 2.6 -16.5 3.0 68.7 NM -10.7 - -54.2 -13.6 - - - 12/15E 14,159 3,617 1,890 (257) 1,633 610 0 (2) 0 2,241 (484) 1,757 0 (130) 0 1,627 1,627 21.6 % ch 7.9 12/15E 0.90 0.90 0.90 0.45 1.04 6.27 1,807.97 % ch 12/15E 6,122 11,792 17,913 5,292 0 8,930 32,135 9,221 517 9,738 6,583 528 0 16,849 11,340 3,946 32,135 % ch 12/15E 1,627 257 520 (413) 1,991 (1,000) 0 0 281 (719) (771) 0 (175) 326 % ch 7.1 6.1 3.0 6.6 1.2 - 4.2 -12.3 2.2 26.8 - 5.5 5.5 7.8 5.5 5.5 5.5 5.5 5.2 8.2 0.0 5.6 -0.8 1.3 16.3 3.7 4.2 4.8 0.00 4.6 0.0 11.2 - 2.9 8.2 -1.1 4.2 5.5 3.0 NM -9.4 37.7 0.0 - 0.9 -1.5 0.00 - - - 12/16E 14,507 3,669 1,893 (265) 1,628 618 0 (10) 0 2,236 (498) 1,739 0 (94) 0 1,645 1,645 22.2 12/17E 14,605 3,660 1,867 (273) 1,594 627 0 (29) 0 2,192 (507) 1,684 0 (48) 0 1,636 1,636 23.2 12/18E 14,682 3,768 1,980 (281) 1,699 636 0 (38) 0 2,297 (579) 1,718 0 (71) 0 1,647 1,647 25.2 12/16E 0.92 0.92 0.92 0.45 1.07 6.84 1,778.59 12/17E 0.92 0.92 0.92 0.45 1.07 7.30 1,778.59 12/18E 0.93 0.93 0.93 0.46 1.08 7.77 1,778.59 12/16E 5,713 12,057 17,769 6,027 0 9,246 33,042 9,364 517 9,881 6,583 542 0 17,006 12,171 3,865 33,042 12/17E 5,330 12,131 17,461 6,754 0 9,564 33,779 9,404 517 9,921 6,583 552 0 17,056 12,985 3,739 33,779 12/18E 5,062 12,189 17,251 7,472 0 9,883 34,607 9,435 517 9,952 6,583 624 0 17,159 13,814 3,635 34,607 12/16E 1,645 265 (122) (497) 1,291 (1,000) 0 0 288 (712) (813) 0 (175) (409) 12/17E 1,636 273 (34) (555) 1,320 (1,000) 0 0 295 (705) (823) 0 (175) (382) 12/18E 1,647 281 (27) (480) 1,421 (999) 0 0 303 (696) (818) 0 (175) (268) Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.1Cash EPS (UBS, diluted) is calculated using UBS net income adding back depreciation and amortization. Keppel Corporation 22 October 2014 13 Keppel Corporation (KPLM.SI) Valuation (x) P/E (local GAAP, diluted) P/E (UBS, diluted) P/CEPS Equity FCF (UBS) yield % Net dividend yield (%) P/BV x EV/revenues (core) EV/EBITDA (core) EV/EBIT (core) EV/OpFCF (core) EV/op. invested capital 12/11 10.4 12.1 10.6 (7.9) 4.3 2.4 1.7 8.8 9.8 10.0 2.8 12/12 8.7 10.1 9.1 0.1 4.2 2.1 1.4 7.1 7.7 7.8 2.2 12/13 10.7 14.0 11.9 (3.8) 3.7 2.0 1.6 10.2 11.7 11.7 2.0 12/14E 11.4 11.4 9.8 2.5 4.4 1.7 1.3 9.3 10.9 10.9 1.8 12/15E 10.8 10.8 9.3 5.7 4.6 1.5 1.1 8.6 9.9 9.9 1.7 12/16E 10.5 10.5 9.0 1.7 4.7 1.4 1.1 8.4 9.8 9.7 1.5 12/17E 10.5 10.5 9.0 1.8 4.7 1.3 1.1 8.3 9.7 9.5 1.4 12/18E 10.5 10.5 8.9 2.4 4.7 1.2 1.0 7.6 8.8 8.7 1.3 Enterprise value (S$m) Market cap. Net debt (cash) Buy out of minorities Pension provisions/other Total enterprise value Non core assets Core enterprise value 12/11 17,872 282 3,801 0 21,955 (4,543) 17,412 12/12 19,330 2,007 4,332 0 25,670 (5,492) 20,178 12/13 19,700 1,913 3,988 0 25,600 (5,747) 19,853 12/14E 17,522 1,197 3,991 0 22,710 (6,062) 16,648 12/15E 17,522 1,141 3,946 0 22,609 (6,377) 16,232 12/16E 17,522 1,183 3,865 0 22,570 (6,693) 15,877 12/17E 17,522 1,183 3,739 0 22,443 (7,011) 15,433 12/18E 17,522 1,183 3,635 0 22,339 (7,330) 15,009 Growth (%) Revenue EBITDA (UBS) EBIT (UBS) EPS (UBS, diluted) Net DPS 12/11 9.0 13.8 14.2 12.8 12.6 12/12 40.2 42.6 47.4 27.0 4.7 12/13 -11.3 -31.4 -35.1 -26.7 -11.1 12/14E 6.0 -8.3 -9.9 9.2 6.6 12/15E 7.9 6.1 6.6 5.5 5.5 12/16E 2.5 0.2 -0.3 2.8 1.1 12/17E 0.7 -1.4 -2.1 -0.6 -0.6 12/18E 0.5 6.1 6.6 0.7 0.7 Margins & Profitability (%) Gross profit margin EBITDA margin EBIT margin Net earnings (UBS) margin ROIC (EBIT) ROIC post tax ROE (UBS) 12/11 37.0 19.9 17.8 15.0 28.2 28.2 21.6 12/12 31.5 20.3 18.8 13.7 28.0 22.7 23.0 12/13 30.6 15.7 13.7 11.4 17.1 13.2 14.9 12/14E 25.7 13.6 11.7 11.7 16.3 11.8 15.3 12/15E 25.5 13.3 11.5 11.5 16.7 11.8 14.9 12/16E 25.3 13.0 11.2 11.3 15.8 11.0 14.0 12/17E 25.1 12.8 10.9 11.2 14.4 9.7 13.0 12/18E 25.7 13.5 11.6 11.2 14.4 9.4 12.3 Capital structure & Coverage (x) Net debt / EBITDA Net debt / total equity % Net debt / (net debt + total equity) % Net debt/EV Capex / depreciation % Capex / revenue % EBIT / net interest Dividend cover (UBS) Div. payout ratio (UBS) % 12/11 0.6 11.4 10.3 7.3 NM 8.0 NM 1.9 51.3 12/12 1.0 20.1 16.8 13.6 NM 5.7 NM 2.4 42.3 12/13 0.6 8.0 7.4 5.5 NM 7.3 NM 2.0 51.2 12/14E 0.7 9.0 8.3 7.8 NM 7.6 NM 2.0 50.0 12/15E 0.5 6.4 6.0 6.0 NM 7.1 NM 2.0 50.0 12/16E 0.7 8.7 8.0 8.7 NM 6.9 NM 2.0 49.2 12/17E 0.9 10.6 9.6 11.5 NM 6.8 55.0 2.0 49.2 12/18E 1.0 11.7 10.5 13.6 NM 6.8 44.2 2.0 49.2 Revenues by division (S$m) Others Total 12/11 9,963 9,963 12/12 13,965 13,965 12/13 12,380 12,380 12/14E 13,123 13,123 12/15E 14,159 14,159 12/16E 14,507 14,507 12/17E 14,605 14,605 12/18E 14,682 14,682 EBIT (UBS) by division (S$m) Others Total 12/11 1,778 1,778 12/12 2,621 2,621 12/13 1,701 1,701 12/14E 1,532 1,532 12/15E 1,633 1,633 12/16E 1,628 1,628 12/17E 1,594 1,594 12/18E 1,699 1,699 Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts. Keppel Corporation 22 October 2014 14 Forecast returns Forecast price appreciation Forecast dividend yield Forecast stock return Market return assumption Forecast excess return +13.6% 4.4% +18.0% 7.4% +10.6% Statement of Risk Earnings and price objective could be at risk if the expected wins from O&M do not materialize or if the order book is poorly executed. Profits would also be affected by policies to curb demand for property in markets that Keppel Land is present in, namely Singapore, China, India and Vietnam. Its cogeneration plant is a merchant plant and is thus exposed to fluctuating tariffs. Keppel Corporation 22 October 2014 15 Required Disclosures This report has been prepared by UBS Securities Pte. Ltd., an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. 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Keppel Corporation 22 October 2014 16 Company Disclosures Company Name Reuters 12-month rating Short-term rating Price Price date Keppel Corporation KPLM.SI Buy N/A S$9.70 22 Oct 2014 Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. Keppel Corporation (S$) Stock Price (S$) Price Target (S$) 15.0 10.0 5.0 01-Oct-14 01-Jul-14 01-Apr-14 01-Jan-14 01-Oct-13 01-Jul-13 01-Apr-13 01-Jan-13 01-Oct-12 01-Jul-12 01-Apr-12 01-Jan-12 01-Oct-11 01-Jul-11 01-Apr-11 01-Jan-11 01-Oct-10 01-Jul-10 01-Apr-10 01-Jan-10 01-Oct-09 0.0 Buy Source: UBS; as of 22 Oct 2014 Keppel Corporation 22 October 2014 17 Global Disclaimer This document has been prepared by UBS Securities Pte. Ltd., an affiliate of UBS AG. 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