Keppel Corporation - DBS Research 2018-07-09: Limited Impact From New Property Measures

Keppel Corporation - DBS Group Research Research 2018-07-09: Limited Impact From New Property Measures KEPPEL CORPORATION LIMITED SGX: BN4

Keppel Corporation - Limited Impact From New Property Measures

  • Singapore residential curbs have limited impact on Keppel. 
  • Singapore residential exposure accounts for < 10% of RNAV.
  • Maintain BUY; Target Price reduced to S$9.10. 

Limited impact from new property measures

  • Reiterate BUY; Target Price reduced to S$9.10, as we widened the RNAV discount to 25% (previously 10%). This is in line with peer CapitaLand, reflecting the recent Singapore residential curbs.
  • The property measures should have limited impact on Keppel, whose Singapore residential exposure forms only < 10% of RNAV.
  • We continue to favour Keppel as a safer proxy to ride the O&M recovery, given its multi-pronged businesses. 
  • Keppel’s decent dividend yield of 3% (based on 40% payout ratio) also lends support to its share price.

Where We Differ: Positive on Tianjin Eco-City.

  • Keppel’s huge historical land bank of ~6.5m sqm is held at a low cost. Half of the land bank is currently under development, progressively realising its RNAV over the next 3-5 years. Out of its remaining undeveloped land bank, 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 has yet to be reflected in our RNAV.
  • In addition, the ongoing portfolio rebalancing exercise will unlock values of completed projects.

O&M on the cusp of recovery.

  • O&M’s contract wins in 2017 bucked the declining trend as the division clinched S$1.2bn worth of new orders, which doubled over 2016. The momentum should continue into 2018 with S$3bn new orders assumed. YTD, Keppel has won ~S$840m new contracts. io. New orders are expected to come from gas and FPSO projects buoyed by sustained oil prices above US$70/bbl.
  • The recovery in new orders towards our assumption could prompt further re-rating of the O&M business.


  • Our Target Price of S$9.10 is based on sum-of-parts valuation:
    1. O&M segment is valued at 2.4x P/BV,
    2. infrastructure at 15x PE on FY18F earnings, 
    3. property segment at 25% discount to RNAV,
    4. investment (Keppel Capital) at 15x FY18F earnings, and
    5. market values/estimated fair values are used for listed subsidiaries.
  • Our Target Price implies 1.3x FY18 P/BV.

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$2-4bn level in FY18- 19, from S$7-8bn during FY12-14.
  • If contract flows do not come through as expected, continued depletion of its orderbook could pose downside risks to our forecast.


Re-introduction of Singapore property measures

  • Property curbs reinstated. On 5 July, the Singapore authorities announced further property curbs by raising Additional Buyer’s Stamp Duty (ABSD) rates by 5ppts and tightening Loan-to-Value (LTV) limits by 5ppts. The aim of these measures is to curb excessive property price increases, which came as a surprise to us. The measures were to be effective from 6 July.

Sales momentum to turn cold.

  • Our property analyst estimates that the combined impact of these measures raises the cost of ownership on an assumed S$1.5m property purchase by S$75,000 (first-time buyer) and S$150,000 (investor). With the increased upfront capital commitment, we expect demand from investors and foreigners to cool in the immediate term. 
  • In terms of sales momentum, we expect total volumes to fall to 9,000-10,000 units in 2018, and potentially even further if these curbs remain.

Limited impact on Keppel.

  • Keppel’s Singapore residential book has been substantially sold. Its only has two launched residential projects in Singapore - Reflections and Corals at Keppel Bay, with c.20% of units remaining for sale. Keppel hasn’t been actively bidding for land in Singapore. The only addition in recent years to Singapore landbank was the Serangoon North Ave 1 (60% stake) with 463k GFA acquired in mid-2017.
  • Singapore residential exposure forms only ~9% of RNAV.

Pei Hwa HO DBS Group Research Research | 2018-07-09
SGX Stock Analyst Report BUY Maintain BUY 9.10 Down 10.200