Keppel shares up as diversification strategy seen to work and analysts reiterate ‘buy’

Shares in Keppel Corp are up 21 cents or 3% to $7.23 after the conglomerate reported 30% on-year rise in 3Q17 earnings to $292 million and analysts maintain their “buy” calls, underscoring the benets of the Singapore conglomerate’s diversication strategy. In a Friday report, UOB KayHian is upgrading Keppel Corp to “buy” with higher target price of $8.35 or 24 times FY17 earnings after incorporating Tianjin Eco-City (TJEC) into its valuations and updating its property valuation using the RNAV method. Last night, Keppel said it plans establish a new business unit, Keppel Urban Solutions (KUS), which aims to be an end-to-end integrated master developer of smart, sustainable precincts.

KUS will leverage on Keppel’s more than two decades of experience as the master developer of large scale projects in Asia, including the China-Singapore Suzhou Industrial Park, Sino-Singapore Tianjin Eco-City, Sino-Singapore Jinan Eco-City, as well as Keppel Bay in Singapore. “Keppel’s stake as master developer at TJEC positions it to yield supernormal prots from land sales, given the recent rise in land prices,” says analyst Foo Zhi Wei. “Our base case points to a valuation of $1,082 million or $0.60 per share. Valuation could expand if the plot ratio rises to 2.0x (currently: 1.1x). Incorporating this into our valuation, alongside a revision to a RNAV valuation for its property division, raises our target price to $8.35,” explains Foo.

In 3Q17 ended Sept, Keppel registered a 10.8% y-o-y rise in revenue to $1.6 billion and a 30% increase in PATMI to $291.8 million, boosted by $128 million gain on disposal of subsidiaries. Property was the top contributor to the group’s earnings at 68%, followed by Investments at 18% and Infrastructure at 14%. The O&M division continued to breakeven in 3Q17, while the property division saw a 26% y-o-y rise in net prot to $198 million in the quarter. Infrastructure’s net prot rose 3% to $40 million while investment’s net prot was $53 million versus $18 million in 3Q16. As for OCBC Research, the house is maintaining a “buy” on the stock with higher fair value of $7.73 or 16 times FY17 earnings based on higher valuations in the property segment. Analyst Low Pei Han says the group’s property segment is mulling the redevelopment of Keppel Towers while the Serangoon North project is expected to be launched in mid-2018. In addition, Keppel has reached an agreement with TS Offshore to defer the delivery of its jackup from 2017 to 2019. New orders secured YTD totalled slightly more than $1 billion, including LNG containerships and carriers, dredgers as well as FPSO conversions. As of Sept 30, net order book for the O&M division was $3.9 billion, excluding the Sete Brasil projects. Meanwhile, RHB is also maintaining its “buy” recommendation with a higher SOPbased target price of $7.92 or 18 times FY17 earnings given Keppel’s 9M17 core earnings came in at $640 million which is in line with the house and consensus expectations.

“Although Keppel’s O&M contributions remain relatively sluggish, we believe its strategy of focusing on non-drilling and specialised projects is the right move. This was evidenced by its contract wins YTD,” says RHB. Property earnings are likely to continue to be lumpy, in our view – mainly coming from its land and project sales in China. This is as the company seeks the best returns for its investments, as well as to rebalance its portfolio in the East Asian nation.
Source: TheEdge