Keppel stays strong with S$9.1b worth of orders until 2014

Hold quality for a period of volatility. With recent developments in the global economy, downside risks to growth have increased significantly, and investors have likewise retreated from the equity market with rising fears of a double dip situation. In the face of volatility, we would advocate defensive and high quality names, and the latter would include Keppel Corporation.

Some characteristics of a high quality name. Although KEP is exposed to the global market, the group has a strong order book of S$9.1b that extends till 2014 to ride through a downturn. Should there be order cancellations, we believe that the group is likely to continue building the rigs for sale later, just like what happened to the rig builders in the 2008 credit crunch.

KEP also has a strong balance sheet which should provide sufficient working capital in a credit crunch and allow it to take advantage of inorganic opportunities when these arise. The group has also been investing for efficiency gains and an enhanced product offering. Meanwhile, with a good track record, Keppel O&M has built a top-notch brand that is synonymous with quality, allowing the group to differentiate on a brand basis.

Slightly lower correlation with oil prices in recent years. As much as KEP is correlated with movements in oil price due to the nature of its business, the relationship has actually become less tight in recent years, save for a spike during the 2008 credit crunch. This may be because above a certain threshold level for oil prices, the rate of increase in capital expenditure by oil companies may slow and hence even though oil prices keep increasing to new highs, KEP's share price may not gain at the same rate as before. The same would hold for a correction in oil prices above the threshold level.

But serious competition in the horizon. However, in KEP's case, the group's up-and-coming competitors are likely to be Chinese yards, several of which are either state-owned or have government links and are generally perceived to have good access to capital. The Korean yards are already recognized builders in the drillship market, and are likely to continue to focus on their shipbuilding forte going forward.

The Chinese yards, however, are starting to present themselves as serious competitors in the jack-up and semi-submersible segments. This is especially so with the Chinese government's intention to develop the country's offshore sector. A slow down in shipbuilding orders have also meant that Chinese yards are increasingly looking to the offshore sector.

KEP has secured S$7.5b worth of new orders YTD, accounting for 88% of our S$8.5b full year order win estimate. However, should the global economy take a turn for the worse in the coming quarters, our earnings estimates for FY12 and beyond would be at risk, especially in a situation of tighter financing.