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Simons Trading Research

Author: simonsg   |   Latest post: Thu, 2 Apr 2020, 5:16 PM

 

Keppel Corporation - O&M Orderbook Picking Up; Keep BUY

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  • Maintain BUY with a SGD7.80 Target Price, 15% upside plus 4% FY20 yield.
  • We are bullish on KEPPEL CORPORATION (SGX:BN4), as we expect offshore and marine (O&M) earnings to improve from a stronger net orderbook – SGD5.1bn from FY18’s SGD4.3bn. Prior to the O&M earnings pick-up, net profit from its property business should support overall profitability and dividend payments.

YTD-October O&M New Contracts Secured Are Valued Higher Than What Was Won in 12M18

  • New contracts secured by Keppel O&M (KOM) YTD were valued at SGD1.9bn (ahead of 12M18’s SGD1.7bn), with close to 60% jobs for LNG and renewables-related projects. KOM’s settlement agreement with Sete Brasil paves the path for the completion of construction of some (or all) of the rigs – which should help drive revenue.
  • KOM’s 3Q19 revenue surge of 52% y-o-y suggests that the recovery is ongoing.

Partial Offer by Temasek Points to a Possible Restructuring Ahead

  • In October, Keppel Corp announced that Temasek intends to make a partial offer of SGD7.35/share in cash to acquire an additional 30.55% stake in Keppel Corp. Upon completion, Temasek will own a 51% stake in Keppel Corp. The intention is for Keppel Corp to remain listed on the SGX.
  • The partial offer can only be made after the pre-conditions (including domestic and foreign regulatory approvals) have been fulfilled or waived, and this may take several months to meet.

Property Segment to Sustain Keppel’s Earnings

  • Keppel Corp’s property division accounted for 66% of 9M19 net profit. As such, we expect property to remain the main earnings contributor over the next few quarters, pending the earnings pick-up from the O&M unit. This diversification provides for continued positive earnings, and a relatively good FY20F dividend yield of 4.4%.

Valuation – Diversified Asset Structure With Huge Value Unlocking Potential

  • Keppel Corp has multiple businesses in different industries, and we used a SOP approach to value the stock, and arrive at a Target Price of SGD7.80.
  • Our valuation comprises: the O&M division being valued at 1.4x FY20F P/BV, a discount vs the 5-year average of 1.6x P/BV for SEMBCORP MARINE LTD (SGX:S51) (BUY, Target Price: SGD1.60), its infrastructure division being valued at a conservative 10x FY20F P/E, and property segment being valued at 40% discount to RNAV – close to the average discount to RNAV applied for China-listed developers.
  • Key risks include a slowdown in the China property market, and weakness in the global O&M industry.

Source: RHB Invest Research - 19 Dec 2019

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