Keppel Corporation - DBS Research 2018-01-22: A Safer O&M Play

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KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - A Safer O&M Play

• Safer proxy to ride property and O&M re-rating.
• Potential sale of six jackup rigs to Borr Drilling a confidence booster.
• Reiterate BUY; Target Price raised to S$10.30.

Reiterate BUY with higher Target Price

• Reiterate BUY with higher Target Price of S$ 10.30 after raising O&M valuation peg to 2.4x P/B multiple (1.8x previously), equivalent to 0.5SD below mean. Keppel Corp is a safer bet to ride on property rerating and O&M recovery. 
• Keppel Corp’s decent dividend yield of 3- 4% (based on 40% payout ratio) also lends support to its share price.

Where we differ: Property’s steep discount to RNAV poised to narrow. 

• Keppel’s property segment remains undervalued at 0.9x P/B, below Singapore developers’ 1.0x, notwithstanding Keppel’s huge historical landbank of 6.5m sqm at lower cost. Half of the landbank is currently under development and expected to complete by 2020, with RNAV to be realised over the next 3-5 years. 
• Out of its remaining undeveloped landbank, 40% is for development projects in Tianjin Eco-City, which Keppel acquired in 2009 at less than one-tenth of the current land price which is yet to be reflected in our RNAV.  In addition, the ongoing portfolio rebalancing exercise will unlock values of completed projects. Hence, we believe the current steep 30% RNAV discount should narrow to ~10%, similar to peer Capitaland, pushing its share price closer to our highest-on-the-street Target Price of S$10.30.

O&M on the cusp of recovery. 

• O&M’s contract wins in 2017 bucked the declining trend as the division clinched S$1.1bn worth of new orders, which doubled over 2016. The momentum should continue into 2018 with S$3bn new orders assumed.
• New orders are expected to come from gas and FPSO projects which are buoyed by sustained oil prices above US$60/bbl. The recovery of new orders towards our assumption could prompt further re-rating of the O&M business.

Valuation

• Our Target Price of S$ 10.30 is based on sum-of-parts valuation:
  1. O&M segment is valued at 2.4x P/B,
  2. infrastructure at 15x PE on FY18F earnings,
  3. property segment at 1.35x P/BV,
  4. investment (Keppel Capital) at 15x FY18F earnings, and
  5. market values/estimated fair values are used for listed subsidiaries. 
• Our Target Price translates to 1.3x FY18 P/B.

Key Risks to Our View

• O&M segment could fare worse than expected. We forecast annual revenues from Keppel O&M to fall to the ~S$2.6bn level in FY17 and FY18, from S$7-8bn during FY12-14. 
• The continued depletion of its orderbook and deferments/cancellations could pose downside risks to our forecast.

WHAT’S NEW

Potential sale of six rigs to Borr Keppel disposing six jackup rigs to Borr.

• Keppel confirmed the Business Times article in relation to a possible sale of six jackup rigs to Borr Drilling. The discussions are ongoing and terms have yet to be finalised. 
• Assuming the total transaction value of US$960m reported in the article is true, it implies a price tag of US$160m per rig. This represents approx. 25% discount to original contract value of c.US$215m. In view of the 20% downpayment collected from customer and potential 5-10% margin, we believe the P&L impact should be minimal.
• Nevertheless, this is very positive news as it removes a key overhang of undelivered rigs. We believe eight out of 17 undelivered jackup rigs are at higher risk of seeing cancellations.

Pei Hwa HO DBS Vickers | http://www.dbsvickers.com/ 2018-01-22

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 10.30 Up 9.800