SINGAPORE (May 24): UOB Kay Hian is reiterating its “hold” call on Keppel Corporation with an unchanged target price of $6.55.

The group yesterday announced that its offshore and marine arm, Keppel Offshore & Marine (Keppel O&M), has won a contract to build two dredgers valued at $120 million, including owner-furnished equipment, for Codralux SA, a wholly-owned subsidiary of Jan De Nul Group.

(See also: Keppel to build two additional dredgers worth $120 mil for Jan De Nul)

In a Wednesday report, analyst Zhiwei Foo says the contract win comes within UOB’s assumption of $1.5 billion worth of order wins for 2017.

“The contract environment remains challenging, with non-drilling rig orders secured to date small in size and not able to fill the void left by the absence of drilling rig orders.” says Foo, noting that Keppel O&M has not seen the large-sized production order awards that it requires to replace its diminishing order book.

“We have largely expected this, as our historical analysis showed that Keppel historically won many small-sized non-drilling rig orders, with large orders far and few between. Non-drilling orders have also historically averaged between $1-3 billion per annum for Keppel,” he adds.  

Meanwhile, the analyst believes continued stability in oil prices at the US$50/bbl level offers Keppel hope for more large, non-drilling orders as the group is currently bidding for several large products, which are expected to see award in 2H17 or later.

“Even if Keppel meets our $1.5 billion contract win assumption, profitability will be lower and unlike levels seen in the previous boom cycle. Property remains the core earnings driver, with O&M likely to fluctuate between marginal profitability or breakeven,” concludes Foo.

As at 11.16am, shares of Keppel are trading 0.8% higher at $6.60.