Keppel Corp - Another Strong Quarter

2Q07 net earnings rises 32%
Keppel Corp recorded another creditable quarter, with a 2Q07 net profit of
S$258.4m, up 32% versus 1Q06, and up 2.7% from 1Q07. Turnover grew by 49.1%
y/y, and up 21% sequentially. This is broadly within our expectation;
however, a better than expected showing at Singapore Petroleum Company
(SPC) was offset by lower than expected contributions from Infrastructure.
Keppel has declared a 9cts per share interim dividend (1.5cts tax franked
and 7.5cts single tier) and has now used up its Section 44 tax credits in
the process.

¨ No major worries at O&M, still the powerhouse
Offshore and marine continues to be the revenue driver, recording a 12%
sequential increase in turnover, and accounting for 70% of total turnover
for the quarter. However, EBITDA declined sequentially by 3%, due to profit
recognition cycles. Consequently, EBITDA margins for the division dipped to
9.9% from 11.4% in the first quarter. As for SPC, profit was higher due to
improved refining margins at around US$9 per barrel, versus the US$7 seen
in 2Q07, mainly on higher product prices. This rise was despite a reduction
in capacity of about 9.2% due to maintenance at one of the refineries.

¨ Infrastructure takes a step back
Infrastructure, however, took a breather from its re-emergence trend ? the
division's EBITDA fell to S$7.1m for the quarter, down from S$9.4m from 1Q.
Keppel said that costs associated to 'legacy projects' continued to hold
back earnings. While we are confident of the division's long term
prospects, it looks unlikely for Keppel to achieve its target of 10%
earnings contribution from infrastructure this year, compounded by the
relative strength in the other divisions. We expect growing contributions
from the 500MW Cogen Plant that was operational since 2Q07 to make a
significant contribution to the division over the rest of the year.

¨ Target price revised to S$15.00; maintain BUY.
Keppel's O&M division will be the mainstay of the company for the
foreseeable future, with its net orderbook at some S$11.3b. While the pace
of new orders has slowed somewhat over the past few months, Keppel has
indicated that the outlook for overall demand remains healthy. For
property, Keppel Land's prospects will be driven by local and regional
projects, especially Vietnam. Local property prices will also drive
earnings for Keppel's own landbank such as Reflections at Keppel Bay and
environs. We are adjusting our FY07 forecast to S$1102.5m from S$958.5m or
an EPS of $0.697, mainly on the back of a better outlook for SPC, offset by
a lower contribution from infrastructure. Similarly, FY08 earnings are
revised to S$1,177.5m from S$1,064.8m. We are also adjusting our
sum-of-parts fair value for Keppel to S$15.00, to reflect the earnings
revision and adjustment for market prices of listed subsidiaries and
associates. We reiterate our BUY recommendation.