SINGAPORE (Jan 23): DBS Group Research believes the share price rallies of Keppel Corp and Sembcorp Marine still have legs, driven by further evidence of sector recovery and contract flows.
Since their July and Feb 2017 upgrade, Keppel and SembMarine shares have gained 26% and 50% respectively. And any potential pullback after recent strong rally of 10-20% presents buying opportunities.
"We have raised our O&M valuation peg to 2.4 times book in anticipation of order wins of $3 billion for each in 2018," says analyst Ho Pei Hwa in a Monday report.
DBS has also lifted the target prices of SembMarine, Sembcorp Industries and Keppel to $3.10, $4.50 and $10.30 respectively.
SembMarine remains DBS' top pick to ride O&G recovery with its strong visible order pipeline; Keppel is a safer bet backed by its multi-pronged business strategy; and Sembcorp Industries could see uplift from a positive strategic review outcome.
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While DBS sees low likelihood of a privatisation of SembMarine, it does not rule out possibility of a yard merger.
See: Do recent share price hikes signal likely privatisation or sale of SembMarine?
Market talk of SembMarine redeveloping its huge 87ha Admiralty Yard into a waterfront township could create value and add $1 to SembMarine's fair value.
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"Given the large size of the project, and significant capital commitment, we believe that the site could be redeveloped in phases over time," says Ho.
Meantime, Keppel is in talks with Borr Drilling on the sale of six jackup rigs.
If the rigs are sold at the reported sale value of US$160 million ($211.1 million) per rig, which implies 25% discount to the original contract value, we do not expect a material impact on the P&L given the 20% downpayment and estimated 5-10% margins.
"This not only removes a key overhang for Keppel, but also reinforces a growing optimism on rig demand and O&G activity level," adds Ho.
As at 10.48am, shares in SembMarine are up 10 cents at $2.49 while shares Keppel are up 28 cents at $8.57.
