Keppel Corporation - UOB Kay Hian 2020-09-23: Small But Important Order

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - Small But Important Order

Keppel Corp (SGX:BN4) reported a S$200m order win which, while relatively small, is an important one in the current bearish industry environment as it enables the company to continue to generate much-needed cashflow for its O&M division. We lower earnings for 2020-22F.
Maintain BUY on Keppel Corp. Target price lowered slightly to S$6.30.

Keppel Corp reported that it has won contracts worth approximately S$200m for two vessels. The high-specification Trailing Suction Hopper Dredger (TSHD) will be constructed at its Brownsville, Texas, shipyard with delivery in 2023, while the Floating Storage and Regasification Unit (FSRU) will be constructed at its Singapore yard with delivery in 2021.
It is notable that the TSHD was ordered by a new client, Manson Construction Co. while the FSRU was ordered by BW Offshore which is a long-term client of the company’s. The projects represent Keppel’s ninth newbuild dredger and fifth FSRU conversion respectively, and both projects are on progressive payment terms, ie consistent cashflow.

In our view, there will be more orders to come in the near to medium term from Manson as well as other clients. We note that Keppel Corp’s CEO of Offshore & Marine (O&M) hinted at further orders from Manson in particular; the 115-year old company has marine construction, dredging, offshore and heavy-lift operations throughout the US, on both the east and west coasts.
Ytd Keppel Corp has won a total of S$307m in new orders compared to no orders for Sembcorp Marine (SGX:S51), and US$714m (S$972m) for Yangzijiang Shipbuilding (SGX:BS6), which also has US$1.3b of options in hand.

Since Temasek backed out of the partial offer, Keppel Corp's share price has declined from S$5.40 immediately prior to the withdrawal of the offer to today’s closing price of S$4.12. This 24% share price decline (vs the STI’s decline of 3%) equates to a loss of S$2.36b in market capitalisation which we view as overdone.
We continue to believe that in the medium to long term, consolidation within the Singapore shipyard sector is inevitable given its fragmented nature vs its Chinese and Korean competitors. Consolidation is made all the more urgent by the fact that both Keppel Corp and Sembcorp Marine face bearish industry conditions, which will last for at least the next 12-18 months, in our view.
One of the many options for consolidation of the Singapore yards may take the form of a Temasek-led buyout of Keppel Corp’s O&M segment and subsequent re-injection into Sembcorp Marine.

We have lowered our earnings estimates for 2020-22F (see table on RHS) to take into account:
1. a slower rate of recovery for the O&M segment;
2. lower margins for the O&M segment in 2020-21F; and also
3. the poor rate of new-order wins for 2020.
At present, we do not expect Keppel Corp to register a loss for the full year given that its property and infrastructure segments continue to recover from COVID-19-related business downturn.

We retain our BUY rating on Keppel Corp but have lowered our SOTP-based target price to S$6.30 (-5.9% from prior target price of S$6.70) as we have fine-tuned our valuation methodology. See details of SOTP in PDF report attached below.
In particular, we have pegged the offshore & marine segment to its Korean and Chinese peers’ P/B of 0.8x (vs DCF previously) while the infrastructure and property segments are also based on target P/B multiples vs its regional infrastructure and China property peers respectively.

We highlight that Keppel Corp’s one-year forward P/B multiple of 0.64x is near its -2SD level of 0.52x, and a significant discount to its 10-year historical average of 1.4x. Historically, Keppel Corp’s trough P/B multiple of 0.29x occurred in Sep 98 at the height of the Asian Financial Crisis, but had recovered to 1.0x P/B by end-98.
See Keppel Corp Share Price; Keppel Corp Target Price; Keppel Corp Analyst Reports; Keppel Corp Dividend History; Keppel Corp Announcements; Keppel Corp Latest News.

Fundamentally, some of Keppel Corp’s businesses are well on the road towards recovery, eg its infrastructure segment which saw improved core earnings y-o-y in 2Q20 as well as property investment.
Meanwhile, the timing of Keppel Corp restarting operations at its Singapore shipyard remains unclear, although we note that the level of daily reported COVID-19 infections at the foreign worker dormitories is now negligible while cases in the broader community are non-existent.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-09-23

SGX Stock Analyst Report BUY MAINTAIN BUY 6.3 DOWN 6.700