Kep Corp has traded downwards over the past 2 weeks after a hitting a high of 10.92 about 2 weeks ago. Now it is back to where it was supported in June 2013 above the 10.25 level. Will be a good blue chip to accumulate at a discounted price below the 10.30 level and to wait for any potential reversal rebound back up. As long as 10.25 is a support level, a rise towards 10.65 and even 10.90 seems likely. A breakdown below 10.25 can see it test the 10.00 psychological level. From the chart, you can see that it is also supported above the channel support line (Upward sloping line) which has guided the uptrend since end 2011.
Citibank: Keppel (KPLM.SI) - 2nd Aug 2013
Superior Margins Can Be Sustained Longer Than You Think
n Benefitting from Jack up ASP trend — The noticeable divergence between jack up and drillship prices should favour Keppel relatively better. Average prices for newbuild jackups in 2013 are comparable, or just slightly under average price of 2007/08 peak.
This suggests 2014-15 margins have minimal downside risks compared to current levels since majority of 2014-15 revenue will emerge from contracts secured at higher levels ((US$205-210mn, >10% above trough levels of US$180mn).
n Can re-rating catalysts emerge? — Penetrating into new products like drillship can be a strong re-rating catalyst, in our view. Keppel has re-designed its drillship specifications and is confident it is a compelling alternative to current ones in the market. Feedback from operators has been positive and raised expectations Keppel is able to overcome earlier challenges to succeed. We see other big ticket wins like semisubs and accommodation semis as catalysts for the stock.
n Could Pemex rival Petrobras potential in the long term? — Keppel has cultivated a close relationship with Pemex and will be the strongest beneficiary of Pemex E&P capex cycle, in our view. In the longer term, the possibility of Pemex having the potential to rival Petrobras cannot be ruled out; wins attributable to Pemex amounted to S$1.8bn over the past 12 months and expected to grow further. Should Pemex decide to introduce local content requirement (similar as Petrobras), we believe Keppel will be better positioned relative to competition.
n Growing Brazil exposure, not a weak link — With a record 6 semis to deliver in Brazil, there are concerns as to whether Keppel would be vulnerable to rising costs/labour issues. We are upbeat and believe high single digit operating margins can be achieved. Keppel has paid its tuition fees, and experienced losses previously when starting its operations since Yr 2000. Petrobras contracts have also turned more favourable vs 2004-08 with cost escalation clauses negotiated in contracts which should lower execution risks.
Superior Margins Can Be Sustained Longer Than You Think
n Benefitting from Jack up ASP trend — The noticeable divergence between jack up and drillship prices should favour Keppel relatively better. Average prices for newbuild jackups in 2013 are comparable, or just slightly under average price of 2007/08 peak.
This suggests 2014-15 margins have minimal downside risks compared to current levels since majority of 2014-15 revenue will emerge from contracts secured at higher levels ((US$205-210mn, >10% above trough levels of US$180mn).
n Can re-rating catalysts emerge? — Penetrating into new products like drillship can be a strong re-rating catalyst, in our view. Keppel has re-designed its drillship specifications and is confident it is a compelling alternative to current ones in the market. Feedback from operators has been positive and raised expectations Keppel is able to overcome earlier challenges to succeed. We see other big ticket wins like semisubs and accommodation semis as catalysts for the stock.
n Could Pemex rival Petrobras potential in the long term? — Keppel has cultivated a close relationship with Pemex and will be the strongest beneficiary of Pemex E&P capex cycle, in our view. In the longer term, the possibility of Pemex having the potential to rival Petrobras cannot be ruled out; wins attributable to Pemex amounted to S$1.8bn over the past 12 months and expected to grow further. Should Pemex decide to introduce local content requirement (similar as Petrobras), we believe Keppel will be better positioned relative to competition.
n Growing Brazil exposure, not a weak link — With a record 6 semis to deliver in Brazil, there are concerns as to whether Keppel would be vulnerable to rising costs/labour issues. We are upbeat and believe high single digit operating margins can be achieved. Keppel has paid its tuition fees, and experienced losses previously when starting its operations since Yr 2000. Petrobras contracts have also turned more favourable vs 2004-08 with cost escalation clauses negotiated in contracts which should lower execution risks.
CIMB – 2ND AUG 2013 (OUTPERFORM)
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