Keppel Corp

Price target:

DBS Group Research “buy” $5.50 OCBC “buy” $6.40 CGS-CIMB “add” $6.46

Clearer roadmap for Vision 2030

DBS Group Research analyst Ho Pei Hwa has upgraded her call on Keppel Corp to “buy” from “hold” with an unchanged target price of $5.50.

“[The] recent price correction of about 20% [following Temasek’s partial offer] has dragged its valuation to near trough of 0.73 times P/B or 2 standard deviation (SD) below its five-year mean (1.1 times P/B),” Ho writes in her Sept 30 report.

On Sept 29, Keppel Corp set out a clearer strategic plan ahead. “Clearer Vision 2030 roadmap and reaffirmation of capital recycling to unlock $3 billion to $5 billion from identified assets over the next three years should restore confidence. Strategic review of O&M shines some light at the end of the tunnel. Yard restructuring is much needed in this prolonged downturn”, Ho adds.

She is also positive on Keppel’s Tianjin Eco-City in China, its huge land bank of some five million sq m that is held at low cost. Half is under development, progressively unlocking its revalued net asset value (RNAV) over the next three to five years.

However, she also foresees downside risks such as lower-than-expected en bloc sales and a smaller number of O&M orders.

The research team at OCBC Investment Research and CGS-CIMB Research analyst Lim Siew Khee have also maintained their “buy” or “add” ratings on the stock, with target prices kept at $6.40 and $6.46 respectively.

The briefing, says the OCBC research team, has partially answered questions on the future of Keppel Corp. “We have always held the view that there is value in Keppel Corp’s stock waiting to be unlocked but the question is how and when”, says the OCBC research team. “Actual successful monetisations of undervalued assets would provide further support to the share price”, it adds.

CGS-CIMB’s Lim says Keppel is targeting the “low hanging fruit” in its monetisation plan, and that its hard target of $3 billion to $5 billion makes the difference this time, compared to its previous asset recycling strategy.

Other “low hanging fruit” could include “paring down its stakes in REITS to 15% to 20%, the optimal level of interest, in its view. This could mean lower stakes in K-REIT (currently 44.31%) and KDC REIT (currently 21.29%)”.

Lim does not rule out a merger of Keppel O&M with Sembcorp Marine (SMM), believing that had the Temasek deal proceeded, the decision to streamline its O&M business would have been “on the cards”.

Lim’s current valuation implies an undervaluation for the group’s O&M business.

“With the clear communication of what is in store ahead, we expect Keppel Corp to trade up to its long-term mean of 8 times 12 months forward P/E or 1.9 times P/B”, Lim adds. — Felicia Tan