KEPPEL CORPORATION LIMITED (SGX:BN4)
SINGAPORE TECH ENGINEERING LTD (SGX:S63)
Capital Goods Sector 2020 Outlook - Strong Recovery In Earnings Growth
- OVERWEIGHT on sector, especially on offshore & marine (O&M) stocks. Reiterate BUY on all three SGX-listed large-cap O&M companies, with KEPPEL CORPORATION (SGX:BN4) as the top O&M pick. Among other companies in the sector, ST ENGINEERING (SGX:S63) is our preferred pick.
- For Keppel Corporation, the re-rating catalyst is Temasek's partial share offer, which is also a precursor to an impending business restructuring, particularly of its O&M arm.
- For ST Engineering, earnings contributions from recently-completed acquisitions and continued strong order wins are key re-rating catalysts.
Growing orderbook across the sector.
- Keppel Corporation’s O&M business has secured SGD1.9bn worth of orders in 2019 (ahead of 12M18’s SGD1.7bn), with LNG and renewable-related projects accounting for c.60% of order wins. Keppel Corporation has an outstanding O&M orderbook of SGD5.1bn (vs. end-Dec 2018’s SGD4.3bn).
- YTD, SEMBCORP MARINE (SGX:S51) has won new contracts worth SGD845m (+16% y-o-y). We expect the ramp-up in O&M orders to be sustained in 2020, on the expected stability in crude oil prices. Keppel Corporation and Sembcorp Marine's settlement agreements with Sete Brasil also pave the way for construction completion of some rigs/drill ships.
- With order wins worth SGD5.4bn in 9M19 (2018: SGD5.2bn), ST Engineering has amassed outstanding orders worth SGD15.9bn, which is an all-time high. This provides revenue visibility of 2.5 years.
Keppel Corp should see growth from non-O&M segments.
- Keppel Corporation’s property division remains the largest contributor to net profit (66% of 9M19 profit). We expect its property segment to remain a major earnings contributor, while the O&M business should undergo a restructuring or record earnings improvement.
- See Keppel Corp Share Price; Keppel Corp Target Price; Keppel Corp Analyst Reports; Keppel Corp Dividend History; Keppel Corp Announcements; Keppel Corp Latest News.
ST Engineering should deliver an outperformance in 2020.
- We believe that ST Engineering’s share price will continue outperforming the STI Index, given its double-digit profit growth outlook for 2020-2021, record-high orderbook with more than two years of revenue visibility, positive FCF-generation capability, reasonable dividend yield, and ability to undertake earnings-accretive acquisitions – similar to its recently-acquired Middle River Aerostructure Systems (MRAS), Newtec and Glowlink acquisitions.
- See ST Engineering Share Price; ST Engineering Target Price; ST Engineering Analyst Reports; ST Engineering Dividend History; ST Engineering Announcements; ST Engineering Latest News.
Key risks
- Key risks for O&M companies are geopolitical uncertainties that could slow the recovery for the global O&M sector.
- Key downside risks for ST Engineering include failure to sustain its current rate of strong order wins, an increase in MRAS and Newtec integration costs, and lower-than-estimated contributions from recently-completed acquisitions.
SOP valuation for Keppel Corp and blended valuation for ST Engineering.
- Given its diversified asset structure with huge value-unlocking potential, we value Keppel Corporation based on a SOP calculation. We value Keppel Corporation’s O&M business at 1.4x FY20F P/BV, which is at a discount to the 5-year average P/BV of 1.6x for Sembcorp Marine. Its infrastructure division is valued at 10x FY20F P/E, and its property division is valued at a 40% discount to RNAV – close to the average discount to RNAV applied for Chinese property developers.
- We value ST Engineering on blended valuations, which is an average of P/E, P/BV, EV/EBITDA and DCF. STE’s19.8x FY20 P/E is below its historical average.
- See company reports:
Leng Seng Choon CFA
RHB Securities Research
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Shekhar Jaiswal
RHB Invest
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https://www.rhbinvest.com.sg/
2019-12-19
SGX Stock
Analyst Report
7.800
SAME
7.800
4.550
SAME
4.550
