Keppel Corp / SembMarine (ALRT):

Keppel Corp / SembMarine (ALRT): We expect Keppel to outperform relative to SMM over the near and intermediate term. The ratio of Keppel/ SMM market cap is now at 1.7x, the lowest in over a decade (even after accounting for K-Green Trust distribution-in-specie), and we anticipate a mean reversion towards 2x, translating to a relative return of >15%. Keppel was last traded at $8.76; SMM at $3.92. We highlight the following:

a) Headwinds in the O&M industry arising from the Gulf of Mexico oil spill are likely to impact SMM more significantly, given its pure-play status. Meanwhile Keppel’s diversified portfolio in property and other investments are seeing improving prospects, and should provide additional uplift to the bottom line.

b) Both Keppel and SMM will be involed in Phase 1 of the Petrobras rig tender, however only Keppel is in the running for Phase 2, given its partnerships with 3 out of 4 of the remaining bidders. Winning this round of tenders could result in a significant rerating for Keppel given the potential size of the contract. SMM on the other hand, did not participate in the bidding for Phase 2.

c)By subtracting the market value of Keppel’s listed investments from its market capitalization, we estimate a stub valuation of 11.0x PE for Keppel’ O&M division, which is nearly on par with SMM’s 11.1x PE. We argue that the former should trade at a premium instead, given its larger scale and better positioning in Brazil where more potential orders are expected to come from.