Keppel Corporation - Undemanding Valuations Amid Stabilising Environment
- Oil prices continue to stabilise.
- Value at 1x book for major segments.
- Upside of 16%.
Interest continues to return; OPEC signals resolve
- In our sector report on 3 Feb 2017, we mentioned that interest is returning to the oil and gas sector, ever since the oil price recovery and subsequent stabilization.
- In Dec last year, OPEC announced that it will cut production – the first time in eight years – and has taken steps to signal its resolve to bolster oil prices, such as by garnering the support of non-OPEC members like Russia, and ensuring compliance by members.
- Yesterday, OPEC’s secretary general said all OPEC producers part of the supply-cut deal are firmly determined to achieve a higher compliance rate than the 90+% compliance reported for Jan.
- Should compliance remain high, there is expectation that OPEC could continue to extend its oil output cuts beyond its previously agreed six month duration.
Should be done with impairments; also doing its part to cut costs
- After reporting significant impairments in its FY16 results, it is less likely that the group will continue with impairments unless there is a sudden drop in oil prices to the earlier $30 range or below.
- With the tough operating environment, apart from reducing variable costs, KEP has also cut its overheads, achieving cost savings of about S$150m year-on-year. The group has mothballed two overseas yards and is in the process of closing three yards in Singapore; these are mainly supporting facilities.
Property to continue to buttress the group
- Meanwhile the property division continues to enjoy good profits, with net profit of S$620m in 2016.
- Looking ahead, the group still expects healthy sales figures for China and Vietnam, and it works to the group’s advantage that they have good exposure to developing countries with continued demand for housing.
- Given KEP’s established track record in property development, the Keppel and Singapore brand should help in continued sales overseas.
Upside of 16% based on 1x book valuations
- In FY16, the group’s total dividend was S$0.20/share, based on a 46% payout ratio (~3% div yield).
- We value KEP’s O&M business at 1x P/B, which is not demanding; upside risk comes from better-than-expected new order flow from non-drilling solutions such as FLNG.
- We also ascribe a 1x P/B to the group’s property segment given the positive outlook for the group’s key markets, and update the valuations of KEP’s other entities.
- As such, our fair value estimate rises from S$6.26 to S$7.40. Upgrade to BUY.