SINGAPORE (Jan 26): OCBC Investment Research and DBS Vickers Securities are maintaining their “buy” recommendations on Keppel Corporation (Keppel) with a fair value and target price of $9.45 and $10.20, respectively.
Both brokers remain positive on Keppel even after the group on Thursday posted its first-ever quarterly loss on the one-off financial penalty arising from one-off global resolution and related costs.
See: Keppel's full-year earnings sink 72% to $217 mil on financial penalty
See: Keppel O&M fined US$422 mil as part of resolution over bribes for contracts by ex-agent Skornicki
In a Friday report, OCBC lead analyst Low Pei Han urges investors to look beyond the 4Q net loss, as the group’s management has kept true to its word of ring-fencing the effect of the financial penalty on its financial dividend by proposing a final dividend 14 cents per share.
The move has brought Keppel’s dividend for the full year to 22 cents per share, recalls Low.
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“The offshore & marine (O&M) division saw a $216m net loss in FY17 (even if the one-off global resolution and related costs were to be excluded), as the segment was also impacted by provisions and doubtful debts… Looking ahead, KEP notes the growing optimism in the O&M industry and continues to see opportunities for production assets, LNG solutions and specialised vessels,” notes the analyst.
Meanwhile, DBS analyst Ho Pei Hwa believes Keppel is now “out of the woods” as a safer bet to ride on property sector re-rating and O&M recovery, although its target price has been adjusted slightly downwards to factor in lower O&M book value.
In her view, Keppel’s decent dividend yield of 3% based on the group’s 40% payout ratio also lends support to its share price, while new orders are expected to come from gas and FPSO projects which are buoyed by sustained oil prices above US$60/bbl.
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A recovery of new orders towards OCBC’s assumption of $3 billion new orders in 2018 could prompt a further re-rating of the O&M business, says Ho, although continued depletion of the group’s orderbook could pose downside risks to the research house’s forecast should the contract flows not come through as expected.
Further, the analyst believes Keppel’s property segment remains undervalued with half of its landbank currently under development and due to realise its RNAV over the next three to five years.
“Out of [Keppel Corp’s] remaining undeveloped landbank, 40% is for development projects in Tianjin Eco-City, which Keppel acquired in 2009 at less than one-tenth of the current land price which is yet to be reflected in our RNAV. In addition, the ongoing portfolio rebalancing exercise will unlock values of completed projects. Hence, we believe the current steep 30% RNAV discount should narrow to ~10%, similar to peer CapitaLand, pushing its share price closer to our highest-on-the-street TP of $10.20,” she concludes.
As at 4:24pm, shares in Keppel are trading 3 cents higher at $8.61, or nearly 16 times FY18 earnings.