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Citi reiterates 'buy' call for Keppel as order book reaches highest level since 2007

Bryan Wu
Bryan Wu9/29/2022 12:30 PM GMT+08  • 3 min read
Citi reiterates 'buy' call for Keppel as order book reaches highest level since 2007
Keppel O&M’s EPC contract with Petrobras for the newbuild P-83 FPSO is a repeat order after it recently secured the P-80 last month. Photo: Keppel Corporation
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Citi Research analysts Brandon Lee and Jame Osman have reiterated their “buy” rating for Keppel Corporation with a target price (TP) of $7.45.

In their report dated Sept 29, the analysts say that Keppel Offshore & Marine’s (Keppel O&M) repeat newbuild floating production storage and offloading (FPSO) contract win from Petrobras worth US$2.8 billion ($4.0 billion) brings Keppel’s order book to a “significant” $11.8 billion — its highest since 2007.

“The win reinforces our positive view on Keppel as it rides the resumption of the floating production cycle, while its OpCo is already currently profitable,” say Lee and Osman. Their $7.45 TP for Keppel is derived by taking a 10% conglomerate discount to a sum-of-the-parts valuation (SOTP) of $8.26.

Keppel O&M’s engineering, procurement and construction (EPC) contract with Petrobras for the newbuild P-83 FPSO is a repeat order after it recently secured the P-80 last month and represents its third FPSO order from Petrobras.

According to the analysts, Keppel had previously flagged that it had been in discussions on an option for a second FPSO tender after securing the P-80 in August, so this win did not come “as a surprise” but is a positive development nonetheless.

Keppel says that P-83 will be similar in terms of specifications and execution methodology to P-80, which is already one of the largest FPSOs globally. Construction for P-83 is slated for 1H2027 completion, following which it will be deployed at the pre-salt Buzios field; P-80 is scheduled to be completed a year earlier in 1H2026. Similar to its expectations for P-80, Keppel expects the P-83 project to be cashflow positive, and will enjoy a down payment of 10%.

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Lee and Osman add that “more importantly”, between now and the respective extraordinary general meetings (EGMs) for Keppel O&M and Sembcorp Marine (SembMarine) scheduled for 4QFY2022, if Keppel O&M continues to secure significant new orders and widen the order book disparity between itself and SembMarine this could mean a “higher likelihood” that the merger resolution is approved.

“Obtaining majority approval among the minority shareholders of SembMarine remains a key risk, given majority shareholder Temasek will abstain from voting,” they note.

Keppel requires over 50% in value for its shareholders for the Keppel O&M scheme as well as AssetCo transactions, while the distribution in specie will require over 50% or over 75% in value if capital reduction. For SembMarine, the restructuring scheme will require over 75% in value and over 50% in number for its shareholders, while the proposed combination transaction will require over 50% in value.

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Key downside risks to Citi’s Keppel valuation includes a further decline in oil prices, which could affect demand for oil production equipment and earnings for its O&M unit, while a prolonged economic slowdown and any government policy changes or sharp interest rate increases in Singapore or China could affect Keppel’s property businesses in these countries.

Slippages in offshore/infrastructure contracts under execution could also lead to penalties or losses and overpaying for acquisitions continues to be a risk.

“If any of these risk factors has a greater downside impact than we anticipate, the share price will likely have difficulty attaining our target price,” say the analysts. “Conversely, if the impact of any of these risks is less than we anticipate, the stock could exceed our target price.”

As at 12.21pm, shares in Keppel Corp were trading at 22 cents or 3.25% up at $6.98.

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