SINGAPORE (Oct 18): On the surface, Keppel Corporation had a dismal 3Q19.

The conglomerate missed analysts’ estimates, as earnings dived 29.7% to $159.3 million during the quarter, down from $226.6 million in 3Q18.

The decline was primarily attributable to the absence of one-off gains from the group’s divestment of a commercial development in Beijing, as well as higher net interest expenses.

Revenue for the quarter surged 60% to $2.07 billion on the back of higher recognition from offshore and marine (O&M), property and infrastructure projects, coupled with increased sales in the power and gas business and the consolidation of M1’s results.

Amid a weak macro-economic outlook, market watchers are quick to caution investors about the higher risk premiums for Keppel Corp’s valuations.

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Yet, they remain bullish on the group’s ability to thrive, especially since underlying operations remain healthy.

For a start, DBS Group Research notes that Keppel is well-positioned to benefit from the recovering O&M orders, as well as rising property sales in key tier 1 and 2 cities in China and Vietnam.

“Year to date, Keppel has won $1.9 billion new contracts, 10% higher than $1.7 billion secured in the whole of 2018. While the uptick in ordering for renewable, gas related and floating production storage and offloading (FPSO) solutions was slower than expected, the pace should gather momentum, buoyed by sustainable oil prices above US$60/barrel,” says analyst Pei Hwa Ho in a Friday report.

Leng Seng Choon, lead analyst at RHB Group Research, affirms the view.

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He notes that the O&M division’s 3Q19 revenue surged 52% to $632 million due to higher revenue recognition from ongoing projects. Leng also highlights how the division’s settlement agreement with Sete Brasil essentially paves the path for completion of the construction of some, or all, of the rights, which should help drive revenue going forward.

In addition, while Keppel’s topline financial figures seem to have stumbled slightly in 3Q19, the research team at OCBC Investment Research opines that the group’s underlying operations remain healthy nonetheless. In particular, the brokerage continues to see value in Keppel’s property portfolio.

“The division remains focused on strengthening its presence in its key markets such as Singapore, China and Vietnam and scaling up in other markets such as Indonesia and India. Meanwhile, as at end September 2019, the group’s net gearing was 0.88 times compared to 0.82 times as at end June,” says OCBC Investment Research.

Leng adds that Keppel’s property division constitutes the largest share of the group’s 9M19 net profit, or some 66%.

DBS is especially positive on Tianjin Eco-city, as the land is “held at low cost”.

“Half of the land bank is under development, progressively unlocking its RNAV over the next 3-5 years. Of [Keppel’s] remaining undeveloped land bank, 30% is for projects in Tianjin Eco-city,” says Ho.

“In addition, the ongoing portfolio rebalancing exercise will unlock values of completed projects,” adds Ho.

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As such, all three brokerages are maintaining their “buy” calls on Keppel Corp, on expectations of improvements in earnings to come from the strong O&M net order book. In addition, property earnings seem poised to support dividend payments for the group.

Both DBS and RHB have, however, slashed their target prices for Keppel Corp. DBS has lowered its target price to $7.50 from the previous $8.50, while RHB has cut its target price to $7.18 from $7.30.

As at 3.35pm, shares in Keppel Corporation are trading 12 cents lower, or down 2.013%, at $5.84, translating to a P/E ratio of 13.2 times and a dividend yield of 3.33% for 2019F, according to DBS valuations.

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