Keppel Corporation - Recovery priced in
- The current valuation implies that O&M is trading at 2.9x CY16 P/BV (vs. SMM’s 1.3x) and 26x CY17 P/E, mimicking a super cycle.
- We have forecast moderate order and margin recovery.
- Downside risk is slower-than-expected order momentum. Maintain Reduce and target price (S$5.14), based on RNAV.
Forecasts price in recovery in O&M
- Our forecasts assume a gradual recovery in order momentum from c.S$500m as of 9M16 to S$1.2bn in FY17F and S$2bn in FY18F.
- We also project margin recovery as the general operating environment improves. Our O&M EBIT assumptions are 11.6%, 12.2% and 12.3% for FY16, FY17 and FY18, respectively.
Drillers are unlikely to start ordering vigorously
- Global jack-up rig order books stood at 119 units and floaters at 60 as at Nov 16. This will take at least 2-3 years to be digested by the market, even if oil prices trend up to US$60/bbl.
- The hope is for Petrobras to resume spending and restructure a plan to restart the semi-submersibles built by KEP that have been put on hold. However, if oil prices are capped at US$60/bbl on the shale gas threat, we doubt that the Brazilian NOC will resume its aggressive capex plans as during the glory days of US$80/bbl.
- The ongoing corruption investigation is another hurdle to cross.
Rightsizing in process
- KEP is still rightsizing its O&M operations and we expect to see some impairment in 4Q16 (although less severe than the Brazilian provisions made in 4Q15 of c.S$230m) as a result of mothballing of under-utilised yards.
Property vs. Singapore peer
- We think our valuation of KEP’s property division at a 30% discount to RNAV is fair.
- Its Singapore peer Capitaland is trading at a c.40% discount to RNAV. Capitaland could be a better proxy for the China property market given its tier-1 city exposure. It also has a more resilient income profile, with 70-80% of its profit from recurring investment property sources. In contrast, c.40% of KEP’s property income is recurring from K-REIT and fund management. Its China’s land bank is also mostly in tier-2 cities and township planning, which has a longer gestation period.
- The group’s net gearing of 0.57x as of 3Q16, dragged by O&M, may cap large new property investment opportunities by KEP alone. More asset-recycling and JVs are needed.