Seeking Alpha: Keppel Hoping A Different Structure Can Produce Better Results

These are challenging times for Keppel Corp (OTCPK:KPELY). As one of the largest builders of offshore drilling rigs, Keppel is looking at an increasingly tough operating environment as low oil prices have pushed down rig utilization and dayrates, stressing already highly leveraged drillers and leading to delivery delays and cancellations. With that, the company's ADRs have fallen by more than a quarter since my last update.

Keppel is looking at a pretty solid order book that will keep its yards busy for the next two years, but there are serious questions about what happens after that. Unless oil prices turns up sharply this year (and look likely to stay there), it's hard to see where the replacement orders are going to come from. That makes management's decision to acquire all of Keppel Land even more significant to the long-term story, as property development may be the company's only viable option for growth after the offshore order book dries up. While Keppel does still pay a solid dividend and appears to be undervalued by a double-digit percentage, the significant operating uncertainties make it difficult to argue for buying these shares.

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Keppel Hoping A Different Structure Can Produce Better Results

Seeking Alpha: Keppel Corp.'s Frustrating Lack Of Progress

As Top Idea picks go, my bullish call on Keppel Corp. (OTCPK:KPELY) in September of 2013 has been lousy - the shares are down a little less than 1% since then (lagging the Straits Times Index by about 2%) and readers would have frankly been better off with a money market account. The good news, if you can call it that, is that nothing has fundamentally changed for the worse for Keppel and there are arguments to be made that the business is stronger today. The sentiment around marine builders isn't great right now given shaky dayrates and utilization, not to mention uncontracted rigs coming out of shipyards later this year, but I continue to believe that Keppel is a high-quality play on a long-term offshore cycle that isn't over yet.

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Keppel Corp.'s Frustrating Lack Of Progress

Seeking Alpha: Keppel's Collected Parts Are Undervalued

I'll say it right up front - researching, valuing, and owning Singapore's Keppel Corporation (KPELY.PK) is going to be more of a headache than some investors want. This large conglomerate not only operates a huge rig-building shipyard and power/gas infrastructure business, it also owns sizable stakes in numerous listed companies, including Keppel Land (KPPLY.PK) and K-REIT. If that weren't enough, the government-owned investment company Temasek is a major holder of Keppel shareholders and quite a lot of Keppel's projects ultimately involve dealing closely with the government.

Despite those risk factors and/or drawbacks, I'm bullish on Keppel. While the company's shares took a big step down during the global recession, the company has a long-term history of building shareholder value. With the company still looking forward to significant rig orders and owning a majority stake in a premier Asian property developer, I believe Keppel is a solid, undervalued, income-generating stock trading about 20% below its fair value, and a stock that is capable of being a core holding for those looking to add international exposure.

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Keppel's Collected Parts Are Undervalued