SINGAPORE (Apr 20): Keppel Corporation saw its earnings jump 33.7% year-on-year to $337.5 million for the 1Q ended March – the highest level achieved in nine quarters since 4Q15. But is the worst over for the conglomerate?

See: Keppel's 1Q earnings up 34% to $337.5 mil on divestment gain and higher revenue

Keppel Corp’s stellar 1Q18 results comes fresh off a net loss of $495 million in the preceding quarter ended December 2017, which was mainly due to a one-off $619 million financial penalty arising from a global resolution with authorities in the US, Brazil, and Singapore.

See: Keppel's full-year earnings sink 72% to $217 mil on financial penalty

The penalty was due to Keppel O&M’s part in a corruption scandal over illegal payments made by its former agent in Brazil, Zwi Skornicki.

It has also accepted a conditional warning from the Corrupt Practices Investigation Bureau (CPIB) in Singapore, and entered into a deferred prosecution agreement with the US Department of Justice (DOJ).

See: Keppel O&M fined US$422 mil as part of resolution over bribes for contracts by ex-agent Skornicki

See also: Keppel corruption probe not yet over; former key execs reportedly arrested

While Keppel’s 1Q18 turnaround seems to signal it has left its troubles behind, analysts note that the latest quarterly results were boosted by a one-off $289 million gain from the divestment of wholly-owned subsidiary Keppel Land China’s stake in Keppel China Marina Holdings.

See: Keppel completes divestment of Keppel China Marina Holdings for $289 mil gain

“Excluding this and one-offs, core net profit was $55 million,” says UOB Kay Hian lead analyst Foo Zhi Wei in a report on Friday. Foo adds that this would have been below expectations, forming just 7% of UOB’s estimates and 6% of consensus estimates.

The brokerage is keeping its “buy” call on Keppel Corp, but lowering its target price slightly to $9.00, from $9.10 previously.

“Our earnings forecasts are under review,” says Foo. “A 74% y-o-y decline in China home sales as well as reduced launches in 2018 see our property earnings estimates having downside risk.”

However, DBS Group Research analyst Ho Pei Hwa is more optimistic about Keppel Corp’s property segment.

“Keppel’s property segment remains undervalued, notwithstanding Keppel’s huge historical landbank of over 6 million sq m held at a low cost. Half of the landbank is currently under development, progressively realising its RNAV over the next 3-5 years,” Ho says.

DBS is keeping its “buy” on Keppel Corp with an unchanged target price of $10.20.

“We believe the current steep 30% RNAV discount should narrow to approximately 10%, similar to peer Capitaland, pushing its share price closer to our highest-on-the-street target price of $10.20,” Ho says.

At the same time, CIMB Research analyst Lim Siew Khee believes the market has not yet priced in a recovery in O&M.

See: As oil recovers, new contracts trickle in for SembMarine and Keppel

“A steadier oil price should see increasing confidence and sustained recovery,” says Lim, adding that the brokerage prefers Keppel Corp over Sembcorp Marine (SMM), due to Keppel’s valuations and stronger balance sheet.

“Pegging Keppel Land’s valuation to Singapore developers’ 30% discount to RNAV would imply a $1.37 billion equity value to Keppel O&M, or 0.8x CY18F P/BV, [which is] a steep discount to SMM’s 1.8x,” she says.

CIMB is keeping its “add” rating on Keppel Corp with an unchanged target price of $10.00.

However, OCBC Investment Research lead analyst Low Pei Han cautions that a sustained recovery in O&M could take time to develop.

“While there are pockets of opportunities in niche markets, management mentioned that ‘it may take some time’ before there is a sustained recovery across the board,” says Low. “Recall that the O&M division started its right-sizing exercise in early 2015, and restructuring is ‘pretty much done’, according to management.”

Low notes that Keppel’s O&M division “still managed to turn in an operating profit with the streamlining in operations” – despite registering the lowest quarterly revenue in years.

OCBC is keeping its “buy” call on Keppel Corp, but lowering its fair value estimate slightly to $9.40, from $9.45 previously.

As at 3.45pm, shares of Keppel Corp are trading 15 cents up, or 1.9% higher, at $8.22. According to OCBC valuations, this implies an estimated price-to-earnings ratio of 15.3 times and a dividend yield of 2.8% for FY18.