Why so bullish on Keppel Corp stock?

Three driving factors will lift the stock and may even lead to a re-rating, says DBS.

In the coming year, Keppel Corp will likely benefit from higher semi-submersible orders, billions worth of rig order contracts from Petrobas, and a Gulf

All combined, the offshore segment of Keppel Corp is shaping up to have a strong order pipeline and will boost the group even as other segments like property face plummeting demand.

Here's more from DBS:

KEP posts record results for FY11. FY11 recurring PATMI was up 14% to S$1.5bn, spot-on with our expectation but ahead of consensus. O&M continues to perform, forming 71% of group PATMI. While 4Q O&M EBIT margins of 21% (vs. 3Q’s 26%) show signs of normalising, this was +1.4ppt ahead of our expectations. Infrastructure disappointed on losses from KIE but was offset by Property, which posted higher contributions from overseas and Singapore projects. KEP proposed a final DPS of 26.0Scts bringing total FY11 DPS to 43.0Scts (FY10 cash DPS: 38.2Scts), translating to a 51% payout ratio and an annualised yield of 4.0%.

Offshore outlook buoyant. With sustained high oil prices and increased E&P budgets of oil companies, offshore activities remain robust, with rig utilization rates on an unabated upward trend since early 2011. We believe the order pipeline remains healthy with KEP continuing to observe healthy levels of enquiries across its suite of offshore products.

BUY, TP raised to S$12.34. We raise FY12/13F by 3% each, after increasing FY12/13F O&M EBIT margins by 1ppt to 18.5%/16.5%, vs. FY11’s 23%. The increase in orderbook and KEP’s strong track record on repeat orders for jack-ups and semi-submersibles will cushion the decline in margins. We favour KEP as a core holding for earnings visibility (book-to-bill of 1.7x), excellent track record, and a global leader to ride on the revival of new rig orders. TP raised to S$12.34, pegging O&M valuation to 16x (+0.5SD) blended FY12/13F earnings as we believe the following catalysts are in place for a re-rating of the stock: 1) a return of semi-submersible orders which have lagged orders for jack-ups and drillships; 2) potential for 5 rig orders from Petrobras worth c. S$5.2bn, which could set another record year for order wins and strengthen earnings visibility; 3) normalisation of activities in the Gulf of Mexico, hence further tightening the supply of modern deepwater rigs.

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