We have downgraded our rating for Keppel Corp to 5 (Sell) from 4 (Underperform). The key reason for this is Keppel’s dearth of new contracts and recent share-price appreciation.

We have raised our SOTP-based six-month target price for Keppel Corp to S$6.12 from S$5.44, due primarily to a change to our assumption for the value of the rig-building business. The upward adjustment is a concession to the view that the market is willing to pay more for an energy-related stock since the previous time we valued Keppel Corp’s stock, but the downside potential from the current price to our new target price reflects our fundamental bearish view on the company.

Keppel Corp is an offshore/marine, property, and utility conglomerate. However, the company’s Offshore & Marine segment has generated 74.1% of the group’s consolidated revenue and 72.3% of its pre-tax profit over the past four quarters. In other words, rig-building is what matters for this company and we, therefore, focus on this segment’s prospects.

Keppel Corp’s share price is up by 88.7% since 9 March 2009, compared with a 78.3% rise in the FSSTI and a 44.6% increase in crude-oil prices over the same period. While economic and equity-market conditions have improved recently, we think that expectations in the market are too high for Keppel Corp’s earnings (even after the upward revisions to our FY10 and FY11 net-profit forecasts, they are still significantly lower than the respective Bloomberg-consensus forecasts). The keyreason for our earnings-forecast revisions is to reflect the adjustment to ourassumption for unannounced rig and ship-repair/maintenance contracts, which factor in the relatively steady revenue stream of this type of business.

Despite the upward revisions to our FY11 revenue and earnings forecasts, they remain among the lowest of all contributors to the Bloomberg consensus (12.0% and 23.0%, respectively, lower than the averages). Accordingly, we think there is potential for Keppel Corp’s earnings to disappoint.

We have raised our SOTP-based six-month target price for Keppel Corp to S$6.12 from S$5.44. The key change to our assumptions is the value we assign to the rigbuilding business, which we benchmark off our target price for SembMarine. We use a DCF to value SembMarine, including a WACC of 10.9% and a terminal growth rate of 1.2%.