Keppel Corp - RHB Invest 2016-01-19: Buy Keppel And Get Offshore Division Free

SGinvestors.io

Keppel Corp KEPPEL CORPORATION LIMITED BN4.SI 

Keppel Corp - RHB Invest 2016-01-19: Buy Keppel And Get Offshore Division Free 

• Keppel’s stock has slid to a point where its offshore and marine (O&M) division is valued below zero. It trades below the book value of its property division alone. 
• Our SOP-based TP of SGD8.08 (from SGD10.00, 67% upside) includes a 35% discount to book value of the property arm. 
• We further note that the stock has displayed c.90% correlation with oil prices, although O&M’s share of the group’s book value/FY16F earnings is only 16%/40%. 
• We think this rout has gone too far. 

 Value of non-O&M assets worth SGD5.56 per share. 

• Keppel’s property and infrastructure divisions, plus its stakes in Keppel T&T (KPTT, NR), Keppel Infrastructure Trust (KIT SP, NR), Dyna-Mac (DMHL SP, NR), K1 Ventures (KONE SP, NR), KrisEnergy (KRIS SP, NR), Tianjin Eco-City, and the Keppel Bay land are worth a total of SGD10.1bn, or equivalent to SGD5.56 per share. 
• This valuation uses a 35% discount to the book value of the property division and 8x FY16F P/E for its infrastructure division, and market values for the listed entities. 
• Keppel currently trades at a 13% discount to this value, implying the market values its O&M division below zero. 

 No rig orders does not mean no work. 

• While we agree that it is unlikely there will be new rig orders for the next two years, this does not equate to not having work. There is still demand for: 
  1. liquefied natural gas vessels, 
  2. floating production, storage and offloading (FPSO) conversions, 
  3. fixed platforms, 
  4. other specialised vessels, and 
  5. vessel repairs. 
• We expect the O&M division to continue generating cash and delivering ROEs well above the cost of equity. 

 O&M division delivered 40% ROE in 9M15. 

• The O&M division delivered SGD542m PATMI in 9M15, which is 40% ROE annualised. 
• Even if O&M earnings halve this year, a 20% ROE still deserves a healthy premium to book value. 
• Our SOP implies 2.5x P/BV, which might appear high but which is based on 8x FY16F P/E, a multiple three-fifths of the market’s long-term average. 
• Further, we note that the O&M’s book value forms only 15.7% of the group’s SGD11.7bn NAV, and would contribute only c.40% of FY16F PATMI, whereas the stock’s 1-year correlation with the oil price is c.90%. 
• The market is treating Keppel like a pure play on oil & gas, ignoring all the other divisions in this diversified conglomerate. 
• Key short-term risk is a potential Sete Brasil bankruptcy, with a 40% impact on the orderbook, but this looks largely priced in. 

Lee Yue Jer CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-01-19

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 8.08 Down 10.00