Keppel Corporation - CGS-CIMB Research 2020-09-22: Trough Valuation Unwarranted


Keppel Corporation - Trough Valuation Unwarranted

  • Keppel O&M has won two contracts worth c.S$200m in total, comprising a high-spec trailing suction hopper dredger and conversion of LNG into FSRU. This brings YTD orders to S$307m, in line with our S$500m forecast. Order book at end-2Q20 was S$3.5bn.
  • Keppel Corp (SGX:BN4) is trading at a new trough of 0.7x CY20F with implied zero value for its Keppel O&M business. We see opportunity to add now (Target Price: S$6.46).

S$200m O&M orders; YTD S$307m

  • Keppel O&M, through its Texas US yard Keppel AmFELS, has clinched a contract to build a high-specification trailing suction hopper dredger (TSHD) for Manson Construction Co. The dredger is Jones Act Compliant and will be a highly automated vessel with a diesel-electric power system. See Keppel Corp Announcements. The project is due for delivery in 2023.
  • The other contract is the conversion of a liquefied natural gas (LNG) carrier into a floating storage and regasification unit (FSRU) bound for Port of Acajutla, El Salvador. The project is due for delivery in 2021.
  • This is the 9th newbuild dredger and 5th FSRU conversion won to-date. The above 2 projects are on progressive payment terms.
  • To date, Keppel O&M has delivered four dredgers and is building four more, with hopper capacities ranging from 6,000m3 to 10,500m3. Keppel O&M’s track record in gas solutions includes FSRUs as well as a number of LNG-fuelled vessels. It also previously delivered the world’s first FLNG (floating liquefaction vessel) and is currently working on a second FLNG as well as Singapore’s first LNG bunkering vessel.

Yard update

  • As of July’s 1H20 earnings update, there was a workforce of about 5,000 in the yard. We believe the number has gradually increased as the number of new COVID-19 cases in the dormitory has reduced to less than 30/day. We believe the yard workforce is currently less than 10k. Total yard workforce before circuit breaker was about 24k.

Reiterate ADD on Keppel Corp and SOP-based Target Price of S$6.46

  • See Keppel Corp's SOP valuation details in PDF report attached below. Keppel Corp is trading at a new trough of 0.7x CY20F P/BV, lower than during the past oil crisis (0.82x P/BV in Jan 16) and GFC (1.33x P/BV in Jan 09). At the current Keppel Corp share price, the market is heavily discounting its O&M business to zero value. We think this is unwarranted as the O&M order book of S$3.5bn is in progress and should be able to guide the yard into profitability in 2021.
  • We have conservatively factored in S$500m/S$1bn of order wins for FY20/21F, below 2019 and 2018 average order wins of c.S$1.9bn. Assuming no significant impairment, we expect Keppel Corp to trade up to its long-term valuation of 12.8x forward P/E (currently at 10.7x CY21F P/E).
  • See Keppel Corp Share Price; Keppel Corp Target Price; Keppel Corp Analyst Reports; Keppel Corp Dividend History; Keppel Corp Announcements; Keppel Corp Latest News.
  • Downside risks include a prolonged recovery in a post-COVID-19 normal.
  • Keppel Corp's 2H earnings recovery and stronger gains from asset recycling are re-rating catalysts.

LIM Siew Khee CGS-CIMB Research | 2020-09-22
SGX Stock Analyst Report ADD MAINTAIN ADD 6.460 SAME 6.460