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DBS upgrades Keppel Corp to 'buy'; all analysts have pegged TP of at least $6 on the counter

Felicia Tan
Felicia Tan4/26/2021 4:28 PM GMT+08  • 6 min read
DBS upgrades Keppel Corp to 'buy'; all analysts have pegged TP of at least $6 on the counter
DBS has given Keppel Corp a TP of $6.20, while CGS-CIMB and PhillipCapital have given TPs of $6.40 and $6.12 respectively.
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Analysts are all positive on Keppel Corporation following its 1Q business update on April 22. DBS Group Research has upgraded its recommendation to “buy” from “hold” while CGS-CIMB Research and PhillipCapital have kept their “buy” calls on the counter.

See: Keppel Corporation records 'slightly higher' net profit and stable revenue of $1.89 bil in 1Q business update

DBS analyst Ho Pei Hwa has also raised her target price on Keppel Corp to $6.20 from $5.85 previously.

“In view of the improving business outlook, we remove the 10% discount to book value for Urban Development segment. Our TP is nudged up to $6.20 (from $5.85), which implies 1 times price-to-book value (P/BV), or 0.5 standard deviation or s.d. below 5- year mean,” she writes.

CGS-CIMB’s Lim Siew Khee has maintained her target price of $6.40, the highest among the three brokerages, as Keppel Corp’s 1QFY2021 revenue of $1.89 billion is deemed in line with her expectations at 28% of her FY2021 estimates.

PhillipCapital’s Terence Chua has, too, kept his target price at $6.12 on Keppel Corp, based on sum-of-the-parts (SOTP) valuation with a 10% holding-company discount.

“We value its Offshore & Marine division at 0.6 times book value, about a 16% discount to peers. We value its Property segment at a 40% discount to revalued net asset value (RNAV) and Infrastructure division at 12 times FY2021 earnings, in line with peers. We also value M1 at 12 times FY2021 earnings, a slight discount to listed peers’ average of 13 times. We value Keppel’s stake in Sino-Singapore Tianjin Eco-city at 1.5 times book value,’ writes Chua.

To DBS’s Ho, the 1QFY2021 saw “encouraging improvement” for the group overall, and that the “commendable” results is a “much-awaited” indicator for a turnaround.

“Keppel’s share price has fallen 3-4% this week, more than pricing in potential impairment for KrisEnergy - probably the last shoe the market is expecting to drop,” Ho writes.

“Keppel’s total exposure to KrisEnergy is around $420 million, of which $170 million is captured on Keppel’s book (loan receivables, zero-coupon debt and contract assets) while $250 million of revolving credit facilities (RCF) is not on Keppel’s book but it has provided a corporate guarantee,” she adds.

The way CGS-CIMB’s Lim sees it, Keppel Corp could take in some impairment in the coming quarters from KrisEnergy, a view that PhillipCapital’s Chua shares.

“The carrying value of $423 million comprises loan receivable ($108 million), a revolving credit facility

(RCF) of $251 million for which Keppel Corp is a guarantor via a bilateral contract with DBS Bank, contract asset ($29 million), and zero-coupon notes ($35 million),” she writes.

“The loan receivable (ranked more senior) and RCF are secured over KrisEnergy’s assets which include Cambodian oil concession Block A,” Lim adds.

On the operational improvements across all sectors, Ho notes that the group is “expected to post higher net profit as compared to $160 million a year ago, bucking the disappointing earnings trend in the past three quarters”.

“This would form over 22% of our FY2021 net profit estimate, which seems on track,” she writes.

Urban Development

The group’s Urban Development sector saw strong showing as the segment’s revenue surged some 70% y-o-y on the back of higher home sales due to higher contribution from China and Vietnam property trading projects.

“Divestment gains totalled some $100 million in 1QFY2021 based on our estimates, following the completion of three property disposals in China, Vietnam and UK. This points to an improving property market and sentiment,” says DBS’s Ho.

The divestment of Keppel Bay Tower is expected to be completed in 2QFY2021 and unlocking cash of $600 million and $16 million in gains.

Sino-Singapore Tianjin Eco-City (SSTEC) sold a commercial and residential land plot in Tianjin Eco-City in March and is estimated to yield some $30 million to $35 million in profit by the time of its completion in May.

“Had the divestment of Keppel Bay Tower been completed in 1QFY2021, it would have further reduced the group’s net gearing to 0.81 times. We expect the group to realise additional gains in 1HFY2021 as they finalise the sale of a commercial and residential plot in Tianjin Eco-City, which was sold for RMB1.5 billion ($306.27 million) in March,” writes PhillipCapital’s Chua.

The previously-announced divestments of Chengdu Hilltop Development, Dongnai Waterfront City and First King Properties have realised a total gain of $108 million for Keppel Corp, says CGS-CIMB’s Lim.

“Net gearing improved to 0.88 times at end-Mar vs. 0.91 times at end-FY2021. We estimate Keppel will recognise at least $160 million cumulative gain by 1HFY2021,” she writes. “Key risk to our Add call: unsuccessful sale/charter of stranded rigs.”

Offshore & Marine

In the offshore & marine (O&M) sector, Keppel is in advanced talks with Brazil’s Petrobras to build a newbuild floating production storage and offloading (FPSO) for Buzios for US$2.28 billion ($3.1 billion).

CGS-CIMB’s Lim notes that Keppel’s management sounded “hopeful” in the conference call.

The consortium led by Keppel reportedly beat two other competitors due to the slightly lower tender price.

The cross-border partnership with Korean yard Hyundai Heavy Industries, is “game-changing”, which signals “the revolution of shipyards that once competed head-on for projects”, says Ho.

“If awarded the job, Keppel Corp will adopt an asset-light strategy and subcontract the hull out portion while focusing on the value-add integration… We estimate the hull production could be around 30% of total contract,” says Lim.

Upon materialisation, the FPSO contract will double Keppel’s orderbook to around $6 billion.

For more stories about where the money flows, click here for our Capital section

On the clean energy front, Keppel is expected to net profit contribution of $100 million per annum – from the $5 million to $10 million per annum in profit previously, assuming the First Solar Farm’s 7GW target is achieved, notes Ho. Construction is expected to start in 2022 and completed by 2030 with at least 500MW in capacity.

The group is also jumping on the electric vehicle (EV) bandwagon, in line with its sustainability goals.


Looking ahead, Chua expects Keppel Corp to “speed up the divestment of non-core assets” tracking its $3 billion to $5 billion target in three years.

“Keppel has identified $17.5 billion of assets to be monetised over time, specifically $3 – 5 billion within three years. They have already divested $1.2 billion of assets, realising an estimated gain of $120 million. We see the successful divestment of Rigco as a potential catalyst for the company,” he writes.

As at 4.26pm, shares in Keppel Corp are trading 11 cents higher or 2.02% up at $5.56.

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