Keppel's O&M orderbook and Sete Brasil contracts: cushions against current weakness?

Analysts cite recent downturn in stocks as mere near term disappointments, and expects Keppel's operating margins to persist in the 14-16% range.

While Keppel's Management had cited that long-term sustainable margins are in the 10-12% range but expects to be able to do 12-15% this year, analysts maintain that Keppel has always been on the conservative side in terms of margin guidance.

Its O&M net orderbook will cover itself for 1.5 years, and signed US$4.12b worth of contracts from Sete Brasil cushions Keppel against earnings disappointments in the near-term.

Here's more from Maybank Kim Eng Singapore: 

Keppel Corp’s stock price has taken a beating recently with the global equity market corrections. While Maybank has adjusted the forecasts for more conservative margin assumptions and made revisions to the valuation model, the new target price of SG$12.70 still indicates room for a potential 26% upside in share price. With fundamentals largely intact, investors are advised to accumulate on current weakness.

Going softer on O&M margins 

Maybank is taking a more careful stance on Keppel's Offshore & Marine segment margins. Operating margin for 1Q12 was 15.1% versus 21% the preceding quarter. Management had cited that long-term sustainable margins are in the 10-12% range but expects to be able to do 12-15% this year. Keppel has always been on the conservative side in terms of margin guidance. Previous assumptions were a little on the high side and these have been reduced in revised forecasts. Operating margins are expected to range between 14-16% over FY12- 14F, from 16-18% previously. This is most likely achievable given current pricing environment. Repair and conversion jobs could also improve overall margins.

Macro factors still positive for rig-builders

Overall, macro conditions for the O&M sector remain favourable. A good flow of O&M orders is expected for Keppel in the next 3 years.

Earnings visibility

With an O&M net orderbook that is sufficient to cover itself for 1.5 years, and Letter of Intent signed for US$4.12b worth of contracts from Sete Brasil, Keppel is well cushioned against earnings disappointments in the near-term.