SINGAPORE (May 22): CGS-CIMB Securities is reiterating its “add” call on Keppel Corporation with an unchanged target price of $10 while highlighting the stock as its preferred pick in the capital goods sector as well as a “solid long-term investment candidate” that is on track to regaining its shareholders’ trust, in the research house’s view.   

This comes after recently hosting the group’s CEO on an NDR in the US, where Keppel’s management identified Vietnam as a key market capital allocation; said it was positive on the O&M outlook and synergies to the group; and identified liquidity, employment and economic growth as key factors to its property markets in Singapore, Vietnam and China rather than interest rates.

In a report on Monday, analyst Lim Siew Khee says she believes a stronger balance sheet from Keppel O&M and its property division could result in a special FY18F DPS of 8-10 cents, or a dividend yield payout of about 4.2%, which is higher than peers.

The analyst has raised FY18-20F EPS estimates on higher gains in property, with property ROE possibly reaching 12% for FY18F after factoring potential revaluation gains.

“We think Keppel Urban Solutions (KUS) could enjoy the same success as Sino-Singapore Tianjin Eco-City (SSTEC), but on a smaller scale, with a faster turnaround time and focused on smart precincts,” says Lim.

“O&M outlook is positive on sustained high oil price but we do not anticipate V-shape recovery. Operating leverage to improve on leaner operations and lower interest,” she adds.

In particular, the analyst is expecting Keppel’s receipt of a US$288 million down payment from its client Borr Drilling, from a recent sale of five jack-up rigs, to improve the group’s balance sheet and operating leverage.

CGS-CIMB is forecasting for the group's FY18F order wins to hit $3 billion.

“Keppel is our preferred pick in the capital goods sector given its clear earnings growth strategies. Catalysts include stronger-than-expected turnaround in Keppel O&M, divestment gains from asset recycling in property and higher DPS. Key risks include significantly weaker-than-expected orders at Keppel O&M and an unfavourable outcome on the court claim by EIG,” concludes Lim.  

As at 11.19am, shares in Keppel Corp are trading 7 cents higher at $8.26.