DBS Group Research analyst Ho Pei Hwa has upgraded her call on Keppel Corporation to “buy” from “hold” with an unchanged target price of $5.50.

“[The] recent price correction of about 20% [following Temasek’s partial offer] has dragged its valuation to near trough of 0.73x price to book value (P/BV) or 2 standard deviation (SD) below its 5-year mean (1.1x P/BV),” Ho writes in a report dated September 30.

Keppel Corporation, on September 29, said that it has set out clearer intentions for Vision 2030, and says it will roll out the next steps for its implementation.

See: Keppel Corporation reaffirms Vision 2030, announces strategic review of its offshore & marine business

The group is seeing improvement in its property sales especially in Singapore and China. Activity in its offshore & marine (O&M) business is also picking up.

“Clearer V2030 roadmap and reaffirmation of capital recycling to unlock $3-5 billion from identified assets over the next three years should restore confidence. Strategic review of O&M shines some light at the end of tunnel. Yard restructuring is much needed in this prolonged downturn,” Ho adds.

Ho is also positive on Keppel’s Tianjin Eco-city, its huge land bank of some 5 million sqm that’s held at low cost. Half is under development, progressively unlocking its revalued net asset value (RNAV) over the next three to five years.

However, she also foresees downside risks such as lower-than-expected enbloc sales and a smaller number of O&M orders. Revenue for the group’s O&M business is expected to fall to the $2-3 billion level per annum in FY20-21 compared to $7-8 billion in FY12-14, he says.

The research team at OCBC Investment Research and CGS-CIMB Research analyst Lim Siew Khee have maintained their “buy” or “add” ratings on the stock. They have also maintained their target prices of $6.40 and $6.46 respectively, following Keppel Corporation’s announcement on September 29.

The briefing, says the OCBC research team, has partially answered questions on the future of Keppel Corporation since August, when Temasek announced that it will not be proceeding with the partial offer for the group.

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

“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… Actual successful monetisations of undervalued assets would provide further support to the share price,” it adds.

The way CGS-CIMB’s Lim sees it, Keppel is targeting the “low hanging fruit” in its monetisation plan, and that its hard target of $3-5 billion makes the difference this time, compared to its previous asset recycling strategy.

Lim has also identified other “low hanging fruit” for the group, which could include “paring down its stakes in REITS to 15-20%, the optimal level of interest, in its view. This could mean lower stakes in K-REIT (currently: 44.31%) and KDC REIT (currently 21.29%)”.

On the group’s strategic review for its O&M business, Lim says she does not rule out a merger of Keppel O&M with Sembcorp Marine (SMM), believing that had the Temasek deal proceeded, the decision to streamline its O&M business would have been “on the cards”.

“If there is no M&A deal, we think Keppel Corp could look to sell at least six of its stranded rig-building contracts, fetching $1.5-1.6 billion,” she says.

Lim’s current valuation implies an undervaluation for the group’s O&M business.

“With the clear communication of what is in store ahead, we expect Keppel Corp to trade up to its long-term mean of.8x 12M forward P/E or 1.9x P/BV,” Lim adds.

As at 4.52pm, shares in Keppel Corp are trading 15 cents higher, or 3.5% up at $4.45.