SINGAPORE (Mar 11): RHB Group Research has slashed Keppel Corp’s earnings forecast for FY2020 ending December by 13%, as the recent oil price collapse threatens to crush the conglomerate’s offshore and marine (O&M) forward orderbook.

However, the brokerage is keeping its “buy” call on Keppel Corp, albeit with a slightly lower target price of $7.60, down from $7.80 previously.

The lower earnings forecast comes after talks at a recent OPEC+ meeting collapsed as Russia refused to agree to what would have been the deepest supply cuts seen since the 2008 financial crisis.

Saudi Arabia, the world’s largest oil exporter, then slashed prices for its crude by the most in more than 30 years, triggering a price war that saw prices for the international benchmark Brent crude plunge in the biggest fall since 1991.

“Brent crude sank to US$36.00/bbl, versus the past 12 months’ average of US$63.00/bbl,” says analyst Leng Seng Choon in a March 10 report. “Our house view for Brent crude 2020 average is cut to US$47.00/bbl from US$62.30/bbl.”

“If sustained at a low price, this could adversely affect Keppel’s offshore and marine forward orderbook,” Leng warns.

However, he notes that Keppel Corp recorded net O&M orderbook of $4.4 billion for December 2019 – higher than the $4.3 billion in December 2018.

In addition, the analyst believes higher earnings from Keppel Corp’s property division should support dividends in the meantime.

“Its property arm is valued at a 40% discount to revalued net asset value (RNAV) – close to the average discount to RNAV applied for China-listed property developers,” says Leng.

“Property, which is less affected by the crude oil price slump, accounts for 42% share of Keppel’s RNAV, and should help support its share price,” he adds.

Meanwhile, Leng admits to awaiting further newsflow regarding Temasek’s partial offer to acquire an additional 30.55% stake in Keppel for $7.35 per share.

See: Temasek moves to raise stake in Keppel Corp to 51% with partial offer at $7.35 per share

“The announcement was made in October 2019, and Temasek can only make the offer after the pre-conditions – including domestic and foreign regulatory approvals – are fulfilled or waived,” Leng explains. “If Temasek is successful in raising its stake to 51%, the subsequent strategic review could lead to more value created for shareholders.”

However, he cautions: “If the current global fears escalate further, we will review our forecasts and target price for Keppel again.”

Shares in Keppel Corp closed 15 cents lower, or down 2.6%, at $5.55 on Wednesday. Year-to-date, the counter has plunged by some 18%.

According to RHB valuations, Keppel Corp is trading at an estimated recurring price-to-earnings (P/E) ratio of 11.4 times, a price-to-book (P/B) of 0.9 times, and a dividend yield of 4.4% for FY2020F.