Keppel Corporation - OCBC Investment 2017-09-13: Well-placed To Benefit

Keppel Corporation - OCBC Investment 2017-09-13: Well-placed To Benefit KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Well-placed To Benefit

  • Opportunities in small-scale LNG market.
  • Time needed for roll-out of infrastructure.
  • Supported by other segments meanwhile.

Supporting small-scale LNG distribution in Indonesia 

  • Keppel Corporation (KEP) recently announced that Keppel Offshore & Marine had entered into a Heads of Agreement (HOA) with Pavilion Energy and Indonesia state-owned PT Perusahaan Listrik Negara (PLN) to explore opportunities in the development of small-scale Liquefied Natural Gas (LNG) distribution in West Indonesia. 
  • According to Wood Mackenzie, Indonesia’s small-scale LNG market is a new growth segment that offers interesting opportunities amidst lacklustre demand in the traditional LNG market. In Indonesia, many regions suffer from inadequate power supply. However, the country’s near 260m population is spread across an archipelago of 17,504 islands, making it difficult to build centralised generation outside Java and Sumatra.
  • Meanwhile, similar opportunities may arise in other SE-Asian countries and the Caribbean islands, as they share similar geographic settings.

May translate to demand for more LNG carriers and other assets 

  • Now, as part of Indonesia’s gas-to-power initiative, PLN is developing gas-fired distributed generation in several locations, and is seeking to build small-scale LNG terminals across the archipelago. Should more come to fruition, this would translate to demand for small LNG carriers, presenting opportunities for Keppel Corp, which can also provide other solutions such as FSRUs and power barges. 
  • Recall that in May this year, Keppel Corp secured S$103m worth of contracts to build two LNG carrier vessels with options for three more from Stolt Nielsen Gas.

Property and investments to support earnings for now 

  • That said, while small-scale LNG helps overcome gas supply availability for isolated and remote sites, it entails a higher cost, and is technically and logistically a more challenging option. Time and investments will also be needed for the rollout of infrastructure and other developments. As such, while we are optimistic of Keppel Corp's good position to capitalise on any upcoming opportunities, we are not banking on immediate significant orders that can replace the void from jack-up rig orders. 
  • On the other hand, Keppel Corp's property and investments divisions should be expected to support earnings, driven by China’s ongoing upcycle and Singapore’s impending property market recovery. 
  • Maintain BUY with S$7.36 fair value estimate on Keppel Corp.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-09-13
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 7.360 Same 7.360