Strong Fundamentals Make Keppel a Keeper Despite Economic Crisis

Jan.13.09 | About: Keppel Corporation (KPELY)

Citigroup's Singapore analysts call their periodic reports on the deepwater drilling sector "Drill Bits." As a result, I think one can take with a grain of salt some of the bank's forecasts on Keppel (OTCPK:KPELY) which of course is much more than a maker of offshore jackups and semi-submersibles.

For the record, Keppel has interests in things like property development in Singapore, China, and Vietnam. Its real estate projects range from downtown Singapore office buildings to individual homes and apartments in Saigon. Some of the risk is spread around by its K-REIT which you can invest in (not a recommendation).

It also owns half a local Singaporean oil refinery, SPC, which I expect will be able to raise margins if the price of crude remains low.

Its biggest business is infrastructure, which accounts for about a quarter of revenue, even before the world gets into spending on this sector to get out of the slump.

Having said that, clearly the global economic crisis and the drop in oil prices have hit KPELY. Keppel late last year announced a series of setbacks to its offshore business, run through a series of subsidiaries:

  • Its US$ 420 mn jackups sale to Seadrill (OTC:SDRLF) was confirmed, but instead of more milestones, it will be paid only when the vessels are delivered. In effect, KPELY, which is virtually debt-free, is financing its customer;
  • Its U.S. 405 mn semi-submersibles deal with Scorpion Offshore has been cancelled with KPELY keeping the down payments;
  • Its S$ 69 mn Singmarine deal with Lewek Shipping for a support vessel is likely to be terminated unless Lewek can find another buyer.

This is not pretty but it is not a total disaster either. About half the order book for 2009 has been cancelled. Offshore marine closed Sept. 2008 with an order book of S$13 bn, with deliveries stretched until 2012. Some of that stuff is being built even in the crisis.

Citi dropped its target for the local shares (each equal to half an ADR) to S$4 and rates KPELY as a 2L, a low risk weak buy. This price target cut relates to 2009 sales and net asset value of the shipyard only. Think about housing in 'Nam to convince yourself to keep your KPELY. The fundamentals are very strong.

Disclosure: I own 500 ADRs (equivalent of 1000 singapore shares) of Keppel.