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Analysts maintain 'buy' on Keppel Corp as they look forward to O&M clarity

Felicia Tan
Felicia Tan • 3 min read
Analysts maintain 'buy' on Keppel Corp as they look forward to O&M clarity
Analysts from CGS-CIMB and DBS have maintained their target prices, while OCBC has lowered its TP due to weaker sentiments in oil.
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Analysts from CGS-CIMB, DBS Group Research and OCBC Investment Research (OIR) have maintained their “buy” recommendations on Keppel Corporation as the company reports its return to profitability in 3QFY2020.

CGS-CIMB’s Lim Siew Khee has also maintained her target price of $6.46 and earnings estimates as Keppel’s group revenue for 9MFY2020 of $4.82 billion came in at 74% of her full-year forecast, which is “in line” with expectations.

Earnings before interest, taxes, depreciation and amortisation (EBITDA) for infrastructure was up 3% y-o-y to $119 million for 9MFY2020 while M1’s EBITDA was stable y-o-y at $202 million. Keppel Capital’s management fees grew 17% y-o-y to $123 million.

“We think the near-term re-rating catalysts for Keppel are: 1) outcome of its O&M strategic review, and 2) y-o-y earnings growth in FY2021F,” says Lim.

“We expect Keppel to trade up to its long-term mean of 12.8x 12M forward P/E or 1.9x P/BV. Maintain Add and SOP-based TP of S$6.46. Downside risk: economic recovery taking longer than expected post-Covid outbreak,” she adds.

DBS analyst Pei Hwa Ho has, likewise, maintained his target price of $5.50 on the counter, which implies a dividend yield of 3-4%.

See also: CGS International increases Yangzijiang Shipbuilding TP to $2.35, ups order book win target to US$5.5 bil

Following Keppel’s results, Ho sees the group “set on a recovery path”.

“Property sales is improving especially in Singapore and China while O&M activity is picking up. A clearer Vision 2030 roadmap and reaffirmation of capital recycling to unlock $3-5 billion from identified assets over the next three years should restore confidence,” he notes.

Ho also expects a strategic review of the group’s O&M segment to “shine some light at the end of this long tunnel”.

See also: RHB maintains ‘neutral’ on Japan Foods Holdings at lowered target price of 26 cents

“Yard restructuring is much needed in this prolonged downturn,” he says.

However, Ho is not entirely positive on the stock as he identifies key risks such as lower-than-expected en-bloc sales and O&M orders, which may pose downside risks to forecast.

“En-bloc sales are lumpy by nature, accounting for more than half of property profit in 2018 but only 10% in 2019. O&M revenue is expected to fall to the $2-3 billion level per annum in FY2020-2021, versus $7-8 billion in FY2012-2014,” he adds.

Following the group’s results, the team at OCBC Investment Research says clarity for its O&M business is likely to happen by early 2021.

Unlike its peers, the team has reduced their fair value estimate on the stock to $6 from $6.40 previously.

“We have always held the view that there is value in KEP’s stock waiting to be unlocked but the question is how and when,” it says.

“With management committed to undertaking steps to do this, investors will then focus on the new opportunities that the group will seize (including renewable energy, data centres and smart urban solutions) and its execution ability which will translate to realised returns eventually,” it adds.

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On that, the team has updated its estimates on the stock to account for the “slightly weaker sentiment” in the oil markets due to the rising number of Covid-19 cases.

“Looking ahead, actual successful monetisations of undervalued assets would provide support to the share price,” it says.

As at 4.04pm, shares in Keppel Corp are trading 8 cents higher or 1.8% up at $4.42.

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