Keppel Corporation - RHB Invest 2020-03-10: A BUY Even After Crude Oil Price Collapse


Keppel Corporation - A BUY Even After Crude Oil Price Collapse

  • The recent OPEC+ meeting ended with no agreement, and Brent crude sank to USD36.00/bbl, vs the past 12 months’ average of USD63.00/bbl. If sustained at a low price, this could adversely affect Keppel Corp (SGX:BN4)’s offshore and marine (O&M) forward orderbook.
  • However, Dec 2019 net O&M orderbook of SGD4.4bn (higher than Dec 2018’s SGD4.3bn) is a plus. In the meantime, its property division’s earnings should support dividends.
  • Maintain BUY, with a new SGD7.60 target price from SGD7.80, offering 35% upside plus c.4% FY20 yield.

We cut earnings forecast due to Brent crude price collapse.

  • This week, our house view for Brent crude 2020 average is cut to USD47.00/bbl (from USD62.30/bbl). Consequently, we lowered our O&M earnings, which led to Keppel Corp (SGX:BN4)’s FY20F net profit being cut by 13%.
  • Our SGD7.60 Target Price valuation for Keppel Corp is based on SOTP, as Keppel Corp has a diversified asset structure with huge value unlocking potential.
  • We value the O&M segment at 1.35x FY20F P/BV – at a discount to the 5-year average 1.56x P/BV of Sembcorp Marine (SGX:S51) (BUY, Target Price: SGD1.45, see report: Sembcorp Marine - RHB Invest 2020-02-20: Higher FY19 New Orders, Expecting FY20 Losses).
  • Its infrastructure segment is valued conservatively at 10x FY20F P/E, while its property arm is valued at a 40% discount to RNAV – close to the average discount to RNAV applied for China-listed property developers.
  • Property, which is less affected by the crude oil price slump, accounts for 42% share of Keppel Corp’s RNAV, and should help support its share price.

Our current Target Price assumes the following for 2020:

  • Brent crude average of USD47.00/bbl, global GDP growth of 3.3%, and Singapore GDP growth of 0.6%. If the current global fears escalate further, we will review our forecasts and Target Price for Keppel Corp again.

No further impairment required for Floatel.

  • Floatel International recently announced that its financial situation was unsustainable as liquidity was under pressure and there was a material uncertainty on the servicing of financial liabilities and net working capital requirements over the next 12 months.
  • As of Dec 2019, Keppel Corp’s carrying value of its investments in Floatel was SGD477m (after impairment losses), and Keppel Corp’s assessment is that no further impairment is required.

We await further newsflow regarding Temasek’s partial offer

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-03-10
SGX Stock Analyst Report BUY MAINTAIN BUY 7.60 DOWN 7.800