As part of the Temasek stable, Keppel has stated that the group is currently going through a comprehensive review to create and extract more value from its businesses, and that there were no sacred cows, with the possible divestment of operations that are non-strategic to Keppel.

While this is the first time that the group has refocused its businesses, we believe that the divestment of SPC was made under the helm of Keppel’s newly appointed CEO Choo Chiau Beng (previously deputy CEO), is significant given that SPC was part of Keppel Energy, which Mr Choo had earlier headed.

We believe the group will remain in its three core businesses of offshore & marine, property, and infrastructure & environmental engineering, but would look to divest of other non-core businesses, such as its investment in mobile telephone operator Mobile One Asia held through Keppel T&T, and other peripheral investment holdings.

Keppel disposed of its investments in Keppel Tat Lee Bank in 2000, for example, on the back of the banking mergers in Singapore. The sale of its financial services business helped the group to reduce debt and helped fund the privatisation of its marine and shipyard holdings, then held under a separately listed Keppel FELS.

As part of the strategic review, Keppel recently sold its entire 45.5% stake in SPC to PetroChina for S$1.47bn or S$6.25/share, which is at a 24% premium to the last close. As Temasek-linked companies have been often encouraged to retain and nurture key business where they can establish a regional dominance, we believe the synergistic benefits of Keppel’s continuing to hold a majority stake in SPC have diminished because the task of building a regionally dominant oil and gas group through SPC has proved to be an uphill task, particularly given the tough competition and high capital expenditure involved.

SPC’s main asset comprises a 290,000 b/d (14.5 m tpa) refinery (50:50 JV with Chevron) with an average complexity of 5.4. In 2008, it processed 266 kb/d of crude oil at an average of 92% utilisation rate. Apart from the refinery, SPC operates the third-largest retail network in Singapore with a total of 38 retail stations. It also has some trading and commercial marketing operations.

Keppel had highlighted in its press release on the SPC divestment that the group and PetroChina also plan “to explore opportunities in the offshore oil industry and in other areas of mutual benefit as such opportunities become available”. To sharpen focus on its O&M business, we believe there are opportunities for the group to move into existing or new offshore newbuilding investments (ie, offshore E&P-focused shipyards) in China, investments in offshore E&P operations (ie, offshore rig operators) or jointly expanding offshore operations in Singapore and other significant growth areas, particularly in Brazil.

Keppel’s often stated “near market, near customer” strategy has served the group well with its network of 20 shipyards and offices across 17 countries, allowing it to provide timely services to its global customer base. Its S$9.5bn net orderbook for offshore and marine (as at 1Q09), eg, comprises drilling rigs and production vessel contracts, which are being built at its yards in Singapore, in the US, in China and at its key shipyards in Europe. As oil prices recover to capex positive levels, and as national oil companies begin to lead, if not dominate, in developing their offshore oil and gas fields, we believe these strategic facilities will stand the group in good stead to continue to win a leading share of offshore exploration and production contracts.

Keppel’s presence in Brazil, for example, and strong relationship with Petrobras go back to the early 1980s when Keppel Shipyard first performed ship repairs and ship conversions for the Brazilian NOC. The group has a wholly owned shipyard BrasFELS yard, where it achieved 60-70% of local content requirements for major Petrobras projects, P-51 and P-52.

Keppel posted a 9% y-y rise in 1Q09 net profit to S$285.3mn, with its offshore & marine division earnings rising 60% y-y to S$220.2mn, contributing to 70% of group EBIT earnings. Property EBIT earnings fell 40% to S$62mn, while infrastructure earnings grew 177% to S$37mn. We believe the group’s infrastructure business will be a key segment to watch, given the increased contracts and projects undertaken by the group.

In April, Keppel Seghers won an S$518mn engineering, procurement and construction (EPC) contract to build an energy-from-waste combined heat and power plant in the UK. The plant will be completed in 2012, and is the largest privatisation project of this nature in the UK. The new contract, combined with infrastructure division’s two other EPC contracts in Qatar and smaller contracts will likely provide earnings and track record for the group’s environmental engineering business. Keppel Merlimau co-generation power plant, the NEWater plant, Keppel Gas and the group’s soon-to-be completed Tuas incineration plant is expected to provide a base-load of recurring income for the division.