SINGAPORE (July 21): UOB Kay Hian is keeping its “hold” call on Keppel Corporation with a target price of $6.40, saying there is “no foreseeable improvement” to the group’s offshore & marine (O&M) business despite its recent contract wins.

This follows Wednesday’s announcement of its wholly-owned subsidiary, Keppel Singmarine, securing $100 million worth of dredger-building contracts from Belgium group Jan De Nul.   

(See Keppel Singmarine to build $100 mil worth of dredgers)

In a Thursday report, analyst Zhiwei Foo says this development represents “another small contract win, but a win nonetheless” – bringing Keppel Corp’s year-to-date announced contract wins to $410 million in total.

Two out of the three contracted Trailer Hopping Suction Dredgers (THSDs) are expected to be completed in 2H18, while construction of the third will require a notice within six months from Jan De Nul to exercise the option for the dredger.

Foo points out that until the option of the third dredger is exercised, the contracts add less than their intended $100 million to the group’s order book.

“Given the operating environment exercise of this option is uncertain, we conservatively exclude the third dredger option from our revenue recognition until signs of a firm commitment,” says Foo.

UOB’s contract win assumption thus remains unchanged for now, as the research house await management updates during their 2Q16 results later today.

Foo also highlights that Keppel Corp’s share price is expected to have limited upside. In fact, the analyst says the group’s “weak contract wins” in the near-mid term dampen its earnings outlook and hence, share price.

Although its earnings performance will continue to be driven by its robust property business, he thinks it will be unable to offset the decline from its O&M business. Even a recovery in oil price will not spur higher demand for new build rigs in the near-mid term, he adds, given a “large oversupply” in the market.

UOB expects a substantial recovery in the rig market to come in 2020 at the earliest.

“A strong balance sheet to weather the storm, a stable dividend yield of 4-5% and the O&M business trading at a fraction of its value presents an investment opportunity, though we caution significant volatility in the mid-term,” says the analyst.

“That said, significant tactical upside can be derived from trading the volatility, and we recommend going long at $5.20, representing one standard deviation from our target price of $6.40.”

Keppel Corp last traded at $5.60.