Saturday, April 24, 2010

Keppel's Q1 results draw mixed reactions from analysts

OCBC, CIMB remain optimistic about its prospects, DMG downgrades stock on valuations

DESPITE Keppel Corp's growth in first-quarter net profit, which beat market expectations, investors appeared to be in two minds about the counter.

While the stock staged a late bounce to end trading yesterday at $10.06 - nine cents and 0.9 per cent higher - it had also fallen by as much as 19 cents during the day.

Even as Keppel's $322 million net profit exceeded the consensus expectation of $290 million based on a Dow Jones poll, analysts' target prices on news of the earnings formed a discordant scatterplot yesterday.

OCBC's Low Pei Han raised Keppel's fair value estimate from $10.20 to $11.22, while CIMB's Song Seng Wun had a much more optimistic target price of $12, which he raised from $11.40.

Both of them maintained a recommendation of 'buy' and 'outperform' on the stock, respectively.

DMG's Jason Saw, however, bucked the trend, downgrading Keppel from 'buy' to 'neutral' on valuations.

'The recent share price rally (+21 per cent year-to-date) has moved the stock marginally above our sum-of-the-parts-derived target price of $9.90 per share,' said Mr Saw in his report yesterday.

While Keppel's results were in line with DMG's expectations, the forecast earnings per share for FY2010 and FY2011 were cut by 3 per cent to 'reflect the lower profit estimate for Keppel Land by our property analyst'.

Keppel had recorded a 16.9 per cent decline in revenue to $2.47 billion for the quarter, but had its bottom line shored up by a record group operating margin of 16.5 per cent, driven by the group's offshore and marine (O&M) division.

The division had posted a 13 per cent increase in pre-tax profit to $270 million despite a 30 per cent drop in revenue to $1.49 billion.

While the burning question among analysts on Thursday was whether such margins would be sustainable, the conclusions drawn had been polarised.

The strong margins, driven by projects secured during the 2007-2008 peak and improved efficiency, are 'not likely to be sustainable beyond the next three quarters', according to Kim Eng's Rohan Suppiah.

DBS's Janice Chua and Jeremy Thia, however, said in their report yesterday that 'we believe Keppel's record margins for O&M should be sustained as it works on higher value/margin contracts secured during the upcycle while these projects were executed during the crisis year'.

They also upgraded Keppel from 'hold' to 'buy' and raised its target price to $11.50.

During the earnings conference call on Thursday, Keppel chief executive Choo Chiau Beng had said that 'going forward, it will be a different ballgame'. This was in response to questions about the sustainability of the margins.

The O&M division accounted for 60 per cent of revenue and 58 per cent of pre-tax profit for Keppel in Q1.

Source: Business Times, 24 Apr 2010

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