Keppel Corporation - OCBC Investment 2016-03-22: Continues to develop its other businesses

KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation: Continues to develop its other businesses

With the privatisation of Keppel Land, Keppel Corp (KEP) should be viewed increasingly as a property play, as the Offshore & Marine segment could see continued lack of earnings clarity with low oil prices.
In FY15, Property already accounted for 46% of the group’s net profit, with O&M contributing 32% and Infrastructure 14%.
In our sum-of-parts valuation, the property segment also accounts for about 72% of the group’s total value, due to the low book value of the O&M segment.
Over the years, substantial funds have been paid back to the group in the form of dividends and deployed to the property segment.

Indeed, KEP has been in the property business for the past 30 years. According to the group, Keppel Land’s ROE is one of the highest amongst Asia’s leading property developers at 18.9% p.a. from 2006 to 2015.
But more importantly, the group also hopes to be seen as an asset manager and value creator in its other businesses.
KEP continues to see opportunities in the waste-to-energy market, data centre and logistics segments.
With its expertise in development, it can engage in turn-key projects, add value and finally spin off the assets to unlock value.
KEP is also delineating its asset management businesses more clearly, consolidating them under Keppel Capital. The asset management business manages S$26b of assets and contributed S$60m of profit in 2015.

Despite this, O&M is likely to remain a drag for now. Meanwhile, with the recent rebound in oil prices, valuations for O&M stocks have also recovered.
As there is a growing consensus that oil prices could have bottomed and the imbalances of the oil market are being worked out, we increase our valuation for the O&M segment from 0.7x to 1.0x, while recognizing that risk of further provisions from Brazil remains.
Valuations of large SGX-listed property developers are also now around 0.7x-0.8x book, and we raise our valuation for KEP’s property segment from 0.7x to 0.8x as well.
Meanwhile, we also update the market values of the group’s listed entities. This results in a fair value estimate of S$5.07, implying a 0.9x P/B for the group. Maintain HOLD.

Low Pei Han CFA OCBC Securities | http://www.ocbcresearch.com/ 2016-03-22

OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 5.07 Up 4.38