7 April 2014

Keppel Corporation Ltd O&M margins to remain resilient

Neutral

SINGAPORE | OFFSHORE MARINE | UPDATES Rating:

Strong order book shield Keppel from weakness in deepwater rig market. The deepwater rig market is experiencing further weakness in dayrates as the supply and demand balance continues to worsen. We expect dayrates for all floaters to trend downwards going forward, but the near-term impact for Keppel is limited due to its strong order book with earnings visibility up till 2019. In addition, we expect the jack-up market to be more resilient in the near and medium term (see sector report “Offshore sector turning less positive”, for more discussion on the Offshore Marine sector outlook). Keppel has outperformed peer YTD. Year to date Keppel share price is up 4%, outperforming its Singapore peer Sembcorp Marine by 9%-points. Downgraded to Neutral (from Accumulate); new target price of S$11.35 (from S$12.34). We continue to like Keppel for its resilient O&M operating margin over the next two years, and we still believe that for the company is well-positioned to benefit from any increase in E&P spending from NOCs given its ‘Near Market, Near Customer’ strategy. However, lower growth in global E&P spending as well as increase competition from the Chinese yards are likely to result in lower order wins going forward. We cut our FY14E order forecast from S$7bn to S$5.5bn in view of the less positive sector outlook. We lower our EPS forecasts for FY15E by 3% to factor in the new orders estimate. We trim our target price to S$11.35 (from S$12.34), based on SOTP, valuing the O&M business at 13.0x FY15E P/E (from 14.0x FY15E P/E, to account for the muted offshore fundamentals). Since our target price no longer warrants an Accumulate recommendation, we have downgraded it to Neutral.

Company Description Keppel Corpora ti on is a di vers i fi ed congl omera te wi th four core bus i nes s s egments : Offs hore & Ma ri ne (O&M), Infra s tructure, Property, a nd Inves tments . O&M i s the grea tes t ea rni ngs contri butor, wi th a gl oba l network of 20 ya rds a nd offi ces i n As i a Pa ci fc, Gul f of Mexi co, Bra zi l , Ca s pi a n Sea , Mi ddl e Ea s t a nd North Sea regi ons .

Company Data Raw Beta (Past 2yrs weekly data)

0.96

Market Cap. (USD mn / SGD mn)

15749 / 19833

Ent. Value (USD mn / SGD mn)

19773 / 24911

3M Average Daily T/O (mn)

3.31

Closing Px in 52 wk range

10.01

11.38

11.50 10.50 10.00 9.50 9.00 Apr-14

Jan-14

Volume, mn

Oct-13

Source: Bloomberg, PSR est. *All multiples & yields based on current market price

14 12 10 8 6 4 2 0

11.00

Jul-13

FY11 FY12 FY13 FY14E FY15E 10,082 13,965 12,380 13,143 14,239 1,491 1,914 1,412 1,504 1,692 0.83 1.06 0.77 0.82 0.93 10.8 10.0 14.4 13.3 11.8 4.29 5.11 5.32 5.63 5.99 2.1 2.1 2.1 1.9 1.8 0.43 0.74 0.50 0.44 0.48 4.8% 6.9% 4.4% 4.0% 4.4%

Apr-13

Key Financial Summary FYE Dec Revenue ($ mn) NPAT, a dj. ($ mn) EPS, a dj. ($) P/E (x),a dj. BVPS ($) P/B (x) DPS ($) Di v. Yi el d (%)

(Downgraded from Accumulate) Target Price (SGD) 11.35 Forecast Dividend (SGD) 0.44 Closing Price (SGD) 10.93 Potential Upside 7.9%

KEP SP EQUITY

STI rebased

Major Shareholders 1. Tema s ek Hol di ngs Pte Ltd 2. Aberdeen As s et Ma na gement 3. Bl a ckrock Fund Advi s ors

(%) 21.2 5.9 4.9

Valuation Method SOTP Analyst Nicholas Ong ni chol a s [email protected] l l i p.com.s g +65 6531 5440

Page | 1 MCI (P) 046/11/2013 Ref. No.: SG2014_0045

Keppel Corporation Ltd 7 April 2014 FYE Dec Income statement ($ mn) Revenue EBITDA Depreci a ti on & a morti za ti on EBIT Net fi na nce (expens e)/i ncome Other i tems As s oci a tes & JVs Excepti ona l i tems Profit before tax Ta xa ti on Profit after tax Non-control l i ng i nteres t Net income, reported Net income, adj. Per share data ($) EPS, reported EPS, a dj. DPS BVPS

FYE Dec Balance sheet ($ mn) PPE Inta ngi bl es As s oci a tes & JVs Others Total non-current assets Inventori es Accounts recei va bl es Inves tments Ca s h Others Total current assets Total assets Short-term l oa ns Accounts pa ya bl es Others Total current liabilities Long-term l oa ns Others Total non-current liabilities Non-control l i ng i nteres t Shareholder equity

FY11

FY12

FY13

FY14E

FY15E

10,082 2,106 -209 1,897 16 1,160 240 1,135 3,313 -444 2,869 923 1,946 1,491

13,965 2,607 -211 2,396 26 568 266 561 3,256 -501 2,756 518 2,237 1,914

12,380 2,016 -242 1,774 19 645 355 631 2,794 -397 2,396 551 1,846 1,412

13,143 2,116 -287 1,830 38 15 397 0 2,279 -385 1,895 391 1,504 1,504

14,239 2,370 -350 2,020 58 15 461 0 2,555 -432 2,123 431 1,692 1,692

1.08 0.83 0.43 4.29

1.24 1.06 0.74 5.11

1.01 0.77 0.50 5.32

0.82 0.82 0.44 5.63

0.93 0.93 0.48 5.99

FY11

FY12

FY13

FY14E

FY15E

2,716 99 4,462 5,188 12,464 6,606 2,028 577 3,020 404 12,635 25,099 808 5,710 2,484 9,003 4,069 267 4,335 4,062 7,699

3,337 110 5,267 5,824 14,538 7,661 1,839 417 4,055 697 14,669 29,207 1,006 5,466 2,593 9,064 6,202 362 6,564 4,332 9,246

3,798 86 5,482 2,732 12,098 8,995 1,916 445 5,565 1,037 17,957 30,056 517 5,409 3,416 9,342 6,583 442 7,025 3,988 9,701

4,020 86 5,482 2,732 12,320 9,548 2,034 445 6,120 1,037 19,184 31,505 517 5,742 3,583 9,842 6,583 442 7,025 4,379 10,259

4,179 86 5,482 2,732 12,479 10,345 2,203 445 6,799 1,037 20,830 33,309 517 6,221 3,824 10,562 6,583 442 7,025 4,810 10,913

FYE Dec Cash flow statement ($ mn) CFO Opera ti ng profi t Adjus tments WC cha nges Ca s h genera ted from ops Others Cash flow from ops CFI CAPEX, net Others Cash flow from investments CFF Sha re i s s ua nce Loa ns , net of repa yments Di vi dends Others Cash flow from financing Net change in cash CCE, begi n CCE, end

FY11

FY12

FY13

FY14E

FY15E

1,897 91 -1,890 99 -323 -224

2,396 244 -1,448 1,192 -186 1,007

1,774 144 -734 1,185 -560 625

1,830 287 -157 1,960 -346 1,613

2,020 350 -231 2,139 -374 1,765

-876 -382 -1,258

-836 -233 -1,069

-936 258 -678

-509 397 -112

-509 461 -48

99 809 -724 90 275 -1,207 4,245 3,020

82 2,331 -789 -346 1,277 1,215 3,020 4,055

40 2,130 -669 26 1,528 1,474 4,055 5,564

0 0 -748 -198 -945 556 5,564 6,120

0 0 -820 -217 -1,038 679 6,120 6,799

FY11

FY12

FY13

FY14E

FY15E

10.8 2.1 10.5 4.8%

10.0 2.1 10.2 6.9%

14.4 2.1 13.9 4.4%

13.3 1.9 11.8 4.0%

11.8 1.8 10.5 4.4%

10.3% 20.7% 21.9% 14.1%

38.5% 23.8% 26.3% 28.4%

-11.3% -22.6% -26.0% -26.2%

6.2% 5.0% 3.1% 6.5%

8.3% 12.0% 10.4% 12.5%

20.9% 18.8% 14.8%

18.7% 17.2% 13.7%

16.3% 14.3% 11.4%

16.1% 13.9% 11.4%

16.6% 14.2% 11.9%

Key ratios ROE (%) ROA (%)

25.3% 11.4%

26.4% 10.1%

19.5% 8.1%

15.1% 6.2%

16.0% 6.5%

Net debt/(ca s h) Net gea ri ng (x)

1,857 24.1%

3,153 34.1%

1,535 15.8%

980 9.6%

301 2.8%

FYE Dec Valuation ratios P/E (x), a dj. P/B (x) EV/EBITDA (x), a dj. Di vi dend yi el d (%) Growth & margins (%) Growth Revenue EBITDA EBIT Net i ncome, a dj. Margins EBITDA ma rgi n EBIT ma rgi n Net profi t ma rgi n

Source: Company, PSR

Page | 2

Keppel Corporation Ltd 7 April 2014 Ratings History Market Price Target Price

13 12.5

Source: Bl oomberg, PSR

12 11.5 11 10.5 10 9.5 9

Jan-15

Oct-14

Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

Oct-12

Jul-12

Apr-12

Jan-12

1 2 3 4 5

PSR Rating System Total Returns > +20% +5% to +20% -5% to +5% -5% to -20% < -20% Remarks

Recommendation Buy Accumul a te Neutra l Reduce Sel l

Rating 1 2 3 4 5

We do not ba s e our recommenda tions entirel y on the a bove qua ntitative return ba nds . We cons i der qua l i tative fa ctors l i ke (but not l i mi ted to) a s tock's ri s k rewa rd profi l e, ma rket s entiment, recent ra te of s ha re pri ce a ppreci a tion, pres ence or a bs ence of s tock pri ce ca tal ys ts , a nd s pecul a tive undertones s urroundi ng the s tock, before ma ki ng our fi na l recommenda tion.

Page | 3

Keppel Corporation Ltd 7 April 2014 Important Information This publication is prepared by Phillip Securities Research Pte Ltd., 250 North Bridge Road, #06-00, Raffles City Tower, Singapore 179101 (Registration Number: 198803136N), which is regulated by the Monetary Authority of Singapore (“Phillip Securities Research”). By receiving or reading this publication, you agree to be bound by the terms and limitations set out below. This publication has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this document by mistake, please delete or destroy it, and notify the sender immediately. Phillip Securities Research shall not be liable for any direct or consequential loss arising from any use of material contained in this publication. 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Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this publication. Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment. To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold a interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this publication. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, which is not reflected in this material, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the preparation or issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this material. The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction. Section 27 of the Financial Advisers Act (Cap. 110) of Singapore and the MAS Notice on Recommendations on Investment Products (FAA-N01) do not apply in respect of this publication.

Page | 4

Keppel Corporation Ltd 7 April 2014 This material is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this material may not be suitable for all investors and a person receiving or reading this material should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products. Please contact Phillip Securities Research at [65 65311240] in respect of any matters arising from, or in connection with, this document. This report is only for the purpose of distribution in Singapore. Contact Information (Singapore Research Team) Management Chan Wai Chee (CEO, Research - Special Opportunities) Joshua Tan (Head, Research - Equities & Asset Allocation)

Research Operations Officer Jermaine Tock +65 6531 1240

+65 6531 1231 +65 6531 1249

Macro | Asset Allocation | Equities Joshua Tan +65 6531 1249

Commodities | Offshore & Marine Nicholas Ong +65 6531 5440

US Equities Wong Yong Kai

+65 6531 1685

Telecoms Colin Tan

+65 6531 1221

Real Estate Caroline Tay

Real Estate Lucas Tan

+65 6531 1229

Market Analyst | Equities Kenneth Koh

+65 6531 1791

SINGAPORE Phillip Securities Pte Ltd Raffles City Tower 250, North Bridge Road #06-00 Singapore 179101 Tel +65 6533 6001 Fax +65 6535 6631 Website: www.poems.com.sg

+65 6531 1792

Finance Benjamin Ong +65 6531 1535 Contact Information (Regional Member Companies) MALAYSIA Phillip Capital Management Sdn Bhd B-3-6 Block B Level 3 Megan Avenue II, No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel +603 2162 8841 Fax +603 2166 5099 Website: www.poems.com.my

HONG KONG Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel +852 2277 6600 Fax +852 2868 5307 Websites: www.phillip.com.hk

JAPAN Phillip Securities Japan, Ltd. 4-2 Nihonbashi Kabuto-cho Chuo-ku, Tokyo 103-0026 Tel +81-3 3666 2101 Fax +81-3 3666 6090 Website:www.phillip.co.jp

INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A Jakarta 10220 – Indonesia Tel +62-21 5790 0800 Fax +62-21 5790 0809 Website: www.phillip.co.id

CHINA Phillip Financial Advisory (Shanghai) Co Ltd No 550 Yan An East Road, Ocean Tower Unit 2318, Postal code 200001 Tel +86-21 5169 9200 Fax +86-21 6351 2940 Website: www.phillip.com.cn

THAILAND Phillip Securities (Thailand) Public Co. Ltd 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand Tel +66-2 6351700 / 22680999 Fax +66-2 22680921 Website www.phillip.co.th

FRANCE King & Shaxson Capital Limited 3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France Tel +33-1 45633100 Fax +33-1 45636017 Website: www.kingandshaxson.com

UNITED KINGDOM King & Shaxson Capital Limited 6th Floor, Candlewick House, 120 Cannon Street, London, EC4N 6AS Tel +44-20 7426 5950 Fax +44-20 7626 1757 Website: www.kingandshaxson.com

UNITED STATES Phillip Futures Inc 141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building Chicago, IL 60604 USA Tel +1-312 356 9000 Fax +1-312 356 9005

AUSTRALIA PhillipCapital Level 12, 15 William Street, Melbourne, Victoria 3000, Australia Tel +61-03 9629 8288 Fax +61-03 9629 8882 Website: www.phillipcapital.com.au

SRI LANKA Asha Phillip Securities Limited No 10, Prince Alfred Tower, Alfred House Gardens, Colombo 3, Sri Lanka Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 Website: www.ashaphillip.net/home.htm

INDIA PhillipCapital (India) Private Limited No. 1, C‐Block, 2nd Floor, Modern Center , Jacob Circle, K. K. Marg, Mahalaxmi Mumbai 400011 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 Website: www.phillipcapital.in

Page | 5

Neutral

(from 14.0x FY15E P/E, to account for the muted offshore fundamentals). ..... will be denominated in various currencies including US dollars and Euro and thus ...

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