Industrials / Singapore 16 April 2015

Keppel Corp

1

KEP SP

2 3 4

Target (SGD): 8.550  9.020

Offshore looking weak Royston Tan (65) 6321 3086 [email protected]

• O&M division could see weak orders in 2015 • Likely greater contribution from property division due to privatisation of Keppel Land • Maintaining Hold (3); raising TP to SGD9.02 ■ What's new

Keppel Corp (Keppel)’s 1Q15 revenue and PATMI of SGD2.8bn and SGD360m, account for 22% and 24% of our 2015 forecasts, respectively. We believe its Offshore & Marine (O&M) division will likely face a multitude of headwinds, which include low order wins and margin compression in 2015. The privatisation of Keppel Land, however, has set the wheels in motion for its property division to offset earnings decline from O&M in the quarters ahead, in our view. ■ What's the impact

O&M division likely to underperform. Keppel’s O&M division generated SGD232m in operating profit, down 17% YoY. Its 1Q15 operating margin, at 12%, is 2.2pp lower YoY. We expect further margin compression, due to revenue recognition of low-margin projects in 2015. Management said it has received requests from two clients to defer 8 rigs for another 6 months. It views this deferment positively, given the current full capacity of its yards, with an intended target to deliver 15 rigs in 2015.

Downside: 4.4%

16 Apr price (SGD): 9.440

Order wins likely to decline substantially. Keppel announced SGD500m in new orders YTD, with an existing backlog of SGD11.3bn as at 31 March 2015. We continue to expect a 45% YoY decline in new-order wins in 2015 to SGD3bn as the drilling industry struggles with a deluge of new-rig deliveries in 2015-16, exacerbating the demand/supply imbalance. The saving grace for Keppel would be its robust backlog with order deliveries planned into 2019. Caution is warranted, however, given that about 40% of its order book is exposed to Brazil. We see the risk of contract re-negotiation, assuming credit issues surrounding Sete cannot be fully resolved. Property should plug earnings gap, but not in the near term. The Chinese government is starting to unwind some of its housing and monetary policies, with the central government lowering the downpayment ratio and exempting home owners from sales tax in March 2015. This will, however, require time to translate into higher sales for Keppel Land’s residential business in China, in our view. EPS forecast revisions. We reduce our 2015-17E revenue by 57% to account for lower contribution from Keppel’s infrastructure division. We also trim our operatingmargin assumptions by 1-2pp for its O&M division. Thus, our 2015-17E EPS are 2-4% lower. ■ What we recommend

We continue to maintain a Hold (3) rating on the stock, with a new SOTP-based 12-month target price of SGD9.02 (previously SGD8.55). Despite lowering our operatingprofit estimates for its O&M division, we have a higher target price due to our lower net-debt

5

Buy Outperform Hold (unchanged) Underperform Sell

assumption and higher market value of its share of listed associates and subsidiaries. The key upside risk to our call would be positive market sentiment from higher oil prices while a downside risk would be the full cancellation of its Brazil orders, an event management deems unlikely. ■ How we differ

Our 2015-17E EPS are 9-18% lower than the Bloomberg consensus due we believe to our lower operatingmargin assumptions for the group. Forecast revisions (%) Year to 31 Dec Revenue change Net profit change Core EPS (FD) change

15E (5.2) (3.0) (3.0)

16E (5.5) (3.6) (3.6)

17E (7.0) (2.0) (2.0)

Source: Daiwa forecasts

Share price performance (%)

(SGD) 11.5

100

10.5

91

9.5

83

8.5

74

7.5

Apr-14

Jul-14

Oct-14

Jan-15

Keppel Co (LHS)

65

Apr-15

Relative to FSSTI (RHS)

12-month range Market cap (USDbn) 3m avg daily turnover (USDm) Shares outstanding (m) Major shareholder

7.980-11.080 12.52 33.65 1,805 Temasek Holdings (21.1%)

Financial summary (SGD) Year to 31 Dec Revenue (m) Operating profit (m) Net profit (m) Core EPS (fully-diluted) EPS change (%) Daiwa vs Cons. EPS (%) PER (x) Dividend yield (%) DPS PBR (x) EV/EBITDA (x) ROE (%)

15E 12,289 1,496 1,473 0.808 1.6 (9.1) 11.7 4.4 0.417 1.5 7.9 13.7

16E 11,755 1,464 1,404 0.770 (4.7) (12.8) 12.3 4.4 0.416 1.4 7.9 12.3

17E 9,429 1,175 1,224 0.671 (12.8) (18.0) 14.1 4.7 0.445 1.4 9.2 10.2

Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 5

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Industrials / Singapore KEP SP

16 April 2015

 Keppel: Quarterly financials comparison SGDm Revenue Operating costs Gross profit Staff costs DD&A Other opex Operating profit Associates Net interest income/(expense) Pre-tax profit Tax MI Net profit (PATMI) Adjusted net profit (PATMI) Margins Gross margins OP margins Pre-tax margins Net profit margins Adjusted net profit margins Tax rate

1Q14 2,996.5 (2,053.9) 942.6 (385.7) (62.9) (79.1) 414.8 65.9 11.0 491.7 (97.1) (55.9) 338.7 338.7

4Q14 3,925.3 (2,803.1) 1,122.2 (486.6) (69.3) 359.8 926.1 255.1 (20.0) 1,161.2 (136.3) (298.9) 725.9 386.4

1Q15 2,814.1 (1,802.8) 1,011.4 (486.4) (65.7) (61.0) 398.2 61.2 (4.0) 455.5 (81.3) (13.9) 360.2 360.2

YoY % -6.1% -12.2% 7.3% 26.1% 4.4% -22.9% -4.0% -7.2% -136.2% -7.4% -16.3% -75.1% 6.4% 6.4%

QoQ % -28.3% -35.7% -9.9% 0.0% -5.2% -117.0% -57.0% -76.0% -80.2% -60.8% -40.4% -95.3% -50.4% -6.8%

31.5% 13.8% 16.4% 11.3% 11.3% 19.8%

28.6% 23.6% 29.6% 18.5% 9.8% 11.7%

35.9% 14.2% 16.2% 12.8% 12.8% 17.9%

4.5ppt 0.3ppt -0.2ppt 1.5ppt 1.5ppt -1.9ppt

7.4ppt -9.4ppt -13.4ppt -5.7ppt 3.0ppt 6.1ppt

1Q15 1,927 509 327 51 2,814

% 68% 18% 12% 2% 100%

1Q14 1,919 736 330 12 2,996

% 64% 25% 11% 0% 100%

YoY % 0% -31% -1% 336% -6%

1Q15 203 23 72 62 360

% 56% 6% 20% 17% 100%

1Q14 231 32 62 14 339

% 68% 9% 18% 4% 100%

YoY % -12% -28% 16% 343% 6%

Source: Company

 Keppel: Quarterly revenue by segment SGDm Offshore & Marine Infrastructure Property Investments Total Source: Company

 Keppel: Quarterly net profit by segment SGDm Offshore & Marine Infrastructure Property Investments Total Source: Company

 Keppel: Operating margin trend for O&M division

 Keppel: Orderbook wins by quarters (SGDm) (SGDm)

(%)

7,000

30

6,000

25

5,000

20

4,000 3,000

15

2,000

10

Source: Company

1Q04 2Q 3Q 4Q 1Q05 2Q 3Q 4Q 1Q06 2Q 3Q 4Q 1Q07 2Q 3Q 4Q 1Q08 2Q 3Q 4Q 1Q09 2Q 3Q 4Q 1Q10 2Q 3Q 4Q 1Q11 2Q 3Q 4Q 1Q12 2Q 3Q 4Q 1Q13 2Q 3Q 4Q 1Q14 2Q 3Q 4Q 1Q15

0

1Q15

3Q14

1Q14

3Q13

1Q13

3Q12

1Q12

3Q11

1Q11

3Q10

1Q10

3Q09

1Q09

3Q08

1Q08

3Q07

1,000 1Q07

5

Source: Company

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Industrials / Singapore KEP SP

16 April 2015

Financial summary  Key assumptions Year to 31 Dec Beginning Order-book (SGDbn) New order wins, net (SGDbn) Ending order-book (SGDbn)

2010 5.6 4.6 4.6

2011 4.6 9.8 9.9

2012 9.9 9.8 11.9

2013 11.9 6.8 14.2

2014 14.2 5.5 11.6

2015E 11.6 3.0 6.9

2016E 6.9 3.5 3.1

2017E 3.1 3.5 1.3

2010 5,577 1,041 2,521 9,140 0 (5,768) (1,367) (448) 1,556 55 278 1,889 (560) 182 1,511 1,511 0.859 0.859 0.853 0.420 1,556 1,745

2011 5,706 1,467 2,909 10,082 0 (6,273) (1,433) 448 2,824 40 448 3,313 (444) (923) 1,946 1,946 1.094 1.094 1.083 0.430 2,824 3,033

2012 7,963 3,018 2,984 13,965 0 (9,566) (1,579) (199) 2,621 33 603 3,256 (501) (518) 2,237 2,237 1.248 1.248 1.236 0.450 2,621 2,832

2013 7,126 1,768 3,487 12,380 0 (8,604) (1,668) 26 2,134 34 626 2,794 (397) (551) 1,846 1,538 1.022 0.852 0.844 0.400 2,134 2,377

2014 8,556 1,729 2,997 13,283 0 (9,245) (1,733) 68 2,373 11 504 2,889 (462) (541) 1,885 1,450 1.044 0.803 0.796 0.480 2,373 2,639

2015E 7,761 1,906 2,621 12,289 0 (8,603) (1,764) (427) 1,496 (7) 358 1,847 (314) (60) 1,473 1,473 0.816 0.816 0.808 0.417 1,496 1,773

2016E 7,268 1,802 2,685 11,755 0 (8,228) (1,774) (289) 1,464 (11) 358 1,812 (308) (100) 1,404 1,404 0.778 0.778 0.770 0.416 1,464 1,753

2017E 5,292 1,387 2,750 9,429 0 (6,600) (1,353) (301) 1,175 (11) 358 1,522 (259) (40) 1,224 1,224 0.678 0.678 0.671 0.445 1,175 1,475

2010 1,889 189 (293) (1,101) (233) 450 (922) 188 91 (643) 2,300 74 (757) 5 1,621 0 1,429 (472)

2011 3,313 209 (343) (2,050) (443) 685 (1,084) (174) (0) (1,258) 809 77 (636) 25 275 0 (298) (399)

2012 3,256 211 (225) (1,633) (602) 1,007 (1,323) 97 157 (1,069) 2,331 82 (1,001) (134) 1,277 0 1,215 (317)

2013 2,794 242 (585) (734) (1,093) 625 (936) (440) 698 (678) 2,130 105 (843) 136 1,528 0 1,474 (311)

2014 2,889 265 (641) (1,762) (729) 22 (595) 1,061 410 877 272 0 (1,077) 37 (769) 0 130 (573)

2015E 1,847 277 (462) 3,184 (158) 4,687 (357) 20 (3,600) (3,937) (80) 0 (753) (200) (1,033) 0 (282) 4,330

2016E 1,812 289 (314) (493) (358) 935 (357) 20 0 (337) 6 0 (751) 0 (745) 0 (147) 578

2017E 1,522 301 (308) (31) (358) 1,126 (357) 20 0 (337) 308 0 (803) 0 (495) 0 293 769

 Profit and loss (SGDm) Year to 31 Dec Offshore & Marine Property Other Revenue Total Revenue Other income COGS SG&A Other op.expenses Operating profit Net-interest inc./(exp.) Assoc/forex/extraord./others Pre-tax profit Tax Min. int./pref. div./others Net profit (reported) Net profit (adjusted) EPS (reported)(SGD) EPS (adjusted)(SGD) EPS (adjusted fully-diluted)(SGD) DPS (SGD) EBIT EBITDA

 Cash flow (SGDm) Year to 31 Dec Profit before tax Depreciation and amortisation Tax paid Change in working capital Other operational CF items Cash flow from operations Capex Net (acquisitions)/disposals Other investing CF items Cash flow from investing Change in debt Net share issues/(repurchases) Dividends paid Other financing CF items Cash flow from financing Forex effect/others Change in cash Free cash flow Source: FactSet, Daiwa forecasts

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Industrials / Singapore KEP SP

16 April 2015

Financial summary continued …  Balance sheet (SGDm) As at 31 Dec Cash & short-term investment Inventory Accounts receivable Other current assets Total current assets Fixed assets Goodwill & intangibles Other non-current assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Other non-current liabilities Total liabilities Share capital Reserves/R.E./others Shareholders' equity Minority interests Total equity & liabilities EV Net debt/(cash) BVPS (SGD)

2010 4,783 4,441 1,959 305 11,488 2,243 108 7,143 20,981 393 4,343 2,387 7,123 3,676 459 11,258 176 6,564 6,740 2,984 20,981 15,704 (714) 3.831

2011 3,598 6,219 2,028 404 12,249 2,716 99 9,420 24,483 808 5,323 2,484 8,616 4,069 607 13,292 178 7,212 7,390 3,801 24,483 17,889 1,279 4.144

2012 4,472 7,443 1,995 697 14,607 3,337 110 11,117 29,171 1,006 5,536 2,523 9,064 6,202 326 15,592 178 9,068 9,246 4,332 29,171 18,842 2,736 5.185

2013 6,010 8,995 1,916 1,037 17,957 3,798 86 8,214 30,056 517 5,409 3,416 9,342 6,583 442 16,367 181 9,521 9,701 3,988 30,056 16,637 1,090 5.374

2014 6,107 10,681 2,510 1,889 21,187 2,673 102 7,593 31,555 1,796 5,581 3,597 10,974 5,587 266 16,827 181 10,200 10,381 4,347 31,555 17,675 1,275 5.750

2015E 5,825 8,956 2,189 989 17,959 2,733 102 7,951 28,745 1,437 6,506 2,762 10,704 5,866 266 16,836 181 10,921 11,101 807 28,745 13,979 1,477 6.150

2016E 5,679 7,890 2,093 1,347 17,010 2,781 102 8,310 28,202 1,149 5,357 2,609 9,115 6,160 266 15,541 181 11,574 11,754 907 28,202 13,873 1,630 6.511

2017E 5,972 6,329 1,679 1,706 15,686 2,817 102 8,668 27,272 1,149 4,297 1,971 7,417 6,468 266 14,151 181 11,994 12,174 947 27,272 13,569 1,645 6.744

2010 (25.4) 3.9 3.4 19.5 7.7 36.9 19.1 17.0 16.5 23.7 7.9 12.8 13.6 n.a. 29.6 73.6 1.6 n.a. 48.9 n.a.

2011 10.3 73.8 81.5 28.8 27.0 37.8 30.1 28.0 19.3 27.5 8.6 18.9 22.8 17.3 13.4 72.2 1.4 n.a. 39.3 n.a.

2012 38.5 (6.6) (7.2) 15.0 14.1 31.5 20.3 18.8 16.0 26.9 8.3 14.2 15.4 29.6 15.4 52.6 1.6 n.a. 36.1 n.a.

2013 (11.3) (16.1) (18.6) (31.3) (31.8) 30.5 19.2 17.2 12.4 16.2 5.2 10.3 11.8 11.2 14.2 57.6 1.9 n.a. 39.1 n.a.

2014 7.3 11.0 11.2 (5.7) (5.7) 30.4 19.9 17.9 10.9 14.4 4.7 11.1 13.0 12.3 16.0 60.8 1.9 n.a. 46.0 n.a.

2015E (7.5) (32.8) (37.0) 1.6 1.6 30.0 14.4 12.2 12.0 13.7 4.9 7.2 8.5 13.3 17.0 69.8 1.7 210.4 51.1 25.4

2016E (4.3) (1.1) (2.1) (4.7) (4.7) 30.0 14.9 12.5 11.9 12.3 4.9 7.5 8.8 13.9 17.0 66.5 1.9 137.7 53.5 3.4

2017E (19.8) (15.8) (19.8) (12.8) (12.8) 30.0 15.6 12.5 13.0 10.2 4.4 5.8 6.7 13.5 17.0 73.0 2.1 110.5 65.7 4.5

 Key ratios (%) Year to 31 Dec Sales (YoY) EBITDA (YoY) Operating profit (YoY) Net profit (YoY) Core EPS (fully-diluted) (YoY) Gross-profit margin EBITDA margin Operating-profit margin Net profit margin ROAE ROAA ROCE ROIC Net debt to equity Effective tax rate Accounts receivable (days) Current ratio (x) Net interest cover (x) Net dividend payout Free cash flow yield Source: FactSet, Daiwa forecasts

 Company profile Keppel Corp is a Singapore-based conglomerate with businesses engaged in rig-building, utility operation, and property development/investment. The company is one of the world’s largest rig-builders in terms of global market share. It also operates electricity and waste treatment facilities worldwide. Keppel’s property holdings are primarily through its holdings in Keppel Land (KPLD SP) and K-REIT (KREIT SP).

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