DBS Group Research, CGS-CIMB Research, and OCBC Investment Research have maintained Keppel Corporation (Keppel Corp) at “buy”, although all three brokerages have reduced the group’s target price due to its $930 impairment mainly related to Keppel Offshore & Marine (Keppel O&M).
DBS Group Research analyst Ho Pei Hwa has reduced Keppel Corp’s target price to $6.40 from $6.80 previously, while CGS-CIMB Research analyst Lim Siew Khee slashed the group’s target price to $6.46 from $7.48 previously. OCBC’s research team has also cut Keppel Corp’s target price to $6.40 from $7.16.
See: Impairment of $930 million causes $537 million net loss for Keppel Corp in 1H2020, calls into question Temasek’s partial offer
Ho says excluding impairments, the group’s core profit of $222 million was “commendable”. The group’s core profit also displayed benefits of diversified businesses, he adds.
“The stock has been beaten down since the emergence of impairment news, trading 7.5% below pre-offer share price ($5.84), which we believe has discounted the partial offer premium and factored in a challenging outlook. Valuation is undemanding at 0.9x P/BV, which is [around] 1SD (standard deviation) below mean,” Ho notes in a report dated August 3.
Lim, on the other hand, says Keppel Corp’s 2Q20 loss of $699 million came in way below her expectations of a $30 million loss for the group. However, without the impairment, Keppel Corp’s 1H20 profit of $397 million was “broadly in line” with her estimates of $379 million.
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On that, Lim has cut the group’s earnings per share (EPS) for FY20F by 138% that translates to a 13 cent loss per share to reflect the impairment. She has also cut Keppel Corp’s EPS for FY21F – 22F by 2-5%.
“Our TP reflects lower O&M book value, pegged to 0.5x P/BV (previously 1x), benchmarked to peers and challenging outlook. It trades at c.0.9x FY20F P/BV, close to - 1 s.d. (standard deviation) of 10-year mean,” Lim writes in a report dated July 31.
Following its results on Thursday (July 30), Keppel Corp announced on Saturday (August 1) that Temasek Holdings will decide if it wants to invoke the material adverse change (MAC) clause in its pre-conditional offer for the group of $7.35 per share. Among the MAC pre-conditions is for Keppel Corp’s profit after tax (PAT) to be no less than $556.9 million.
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See also: Pre-conditions for Temasek’s partial offer for Keppel Corp not satisfied
Keppel’s 1H20 PAT came in at a negative $698.8 million.
Lim says that there will be no change in the group’s business model and its 2030 vision without Temasek’s partial offer, but a potential merger between Keppel Offshore & Marine and Sembcorp Marine may not happen as soon as hoped.
“If Temasek walks away from the deal, share price could react in a shock and touch previous trough of 0.82x P/BV in early 2016 during last oil crisis, or S$4.88. Other catalysts: stronger-than-expected recovery in 2H from asset recycling,” Lim says.
On Temasek’s partial offer, Ho says that assuming the tender of 39% of shares is successful, the partial divestment gains could lower Keppel Corp’s cost per share by some 70 cents at its current share price.
However, Ho is positive on Keppel’s Tianjin eco-city project, where 30% of its undeveloped land bank of around 5m sqm was acquired in 2009, and has yet to be reflected in the group’s revalued net asset value (RNAV).
“We forecast annual revenues from Keppel O&M to fall to the [estimated] S$2-3 billion level p.a. in FY20-21, versus S$7-8 billion in FY12-14. If en-bloc sales and O&M contract flows do not come through as expected, these could pose downside risks to our forecast,” he adds.
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Ho has estimated loss per share for the group at 9.4 cents for FY2020F.
Looking ahead, the team at OCBC says Keppel’s O&M division will face “very challenging conditions” in the near future, and that “bold restructuring” is needed.
“The Covid-19 pandemic has also highlighted the industry’s heavy reliance on foreign labour and some re-thinking may be required for more sustainable operations,” it says.
As at 2.43pm, shares in Keppel Corp are changing hands 17 cents lower, or 3.1% down, at $5.23.
