Analysts from CGS-CIMB Research, DBS Group Research and UOB Kay Hian are remaining positive on Keppel Corporation after the group reported overall growth in its revenue for the 1QFY2022 ended March.
On April 21, the group saw overall revenue increase by 9% y-o-y to $2.07 billion. The higher revenue was mainly thanks to higher contributions from its energy and environment business segments.
UOB Kay Hian analyst Adrian Loh is keeping his “buy” call with a higher target price of $7.25 from $6.94 previously as Keppel’s revenue for the 1QFY2022 stood largely in line with his estimate at 21% of his full-year forecast.
To him, the strong quarter bodes well for the group’s performance for FY2022.
“The highlight of the quarter was the energy and environment segment which saw a 43% y-o-y jump in revenue while urban development suffered due to Covid-19- related lockdowns in China,” notes Loh in his report dated April 22.
“With project launches being back-end loaded in 2HFY2022, this segment could yet deliver a turnaround this year,” he adds.
See also: RHB stays ‘neutral’ on telco sector amid fierce SIM-only competition
During the analyst call, Keppel’s management talked about the potential sale of legacy rigs and associated receivables to AssetCo in relation to the merger with Sembcorp Marine (SembMarine).
According to Loh, the group conceded that a bareboat charter of its rigs is more likely than a sale given that it has witnessed more parties looking to discuss bareboat charters vs an outright sale.
“Nevertheless, Keppel remains confident that it will be able to monetise these assets in three to five years, and that the provisions that it has taken in the past are adequate for now,” he says.
See also: DBS upgrades PropNex and APAC Realty to ‘buy’ amid strong pipeline of new launches in 2025
During the call, Keppel added that it remains bullish on the China property market in the medium to longer-term and acknowledged that sentiment within the country have grown increasingly cautious, says Loh.
In addition, the group says it remains well funded unlike its Chinese property counterparts and thus would look to deploy capital to co-invest with some of their business partners for the medium to long term.
Keppel disclosed that its China and Vietnam landbank, accumulated over many years, is currently sitting on its balance sheet at a historical cost of $3.8 billion vs an estimated market value of $6.6 billion, the analyst continues.
As at end-1QFY2022, Keppel Land has nearly 7,500 units overseas with $4.4 billion in sales that it will recognise over 2022-2025.
Loh has kept his earnings forecasts for the group unchanged.
“The company appears to be at an interesting cross-road in 2022 with the exit of its Keppel Offshore & Marine segment and moving towards a more asset-light and recurring earnings business model, and towards its 15% return on equity (ROE) target [compared to the 9.1% in 2021],” says Loh.
“Of interest will be the pace of its asset monetisation which could bolster earnings again in 2022 and thus lead to another dividend surprise.”
For more stories about where money flows, click here for Capital Section
He continues: “At our target price, Keppel would trade at a 2022 P/E of 15.5x which is approximately 0.5 standard deviation above its past five-year average of 13.0x (excluding 2020), and implies a 2022 P/B of just over 1.0x which we view as fair.”
CGS-CIMB Research analyst Lim Siew Khee has also kept her “add” call on Keppel Corporation as she sees the group’s strategy gradually bearing fruit. She has kept her target price unchanged at $7.20.
“We see signs of Keppel’s strategy bearing fruit with [the] divestment of Keppel Logistics, Keppel Infra decarbonisation solutions and asset monetisation,” the analyst writes in her report dated April 21.
On the back of the lower revenue for Keppel’s urban development arm, Lim says the decline in home sales in China and Vietnam should reverse as more projects are slated to launch in the quarters ahead.
Further to her report, Lim estimates about US$3.8 billion ($5.2 billion) of market value for the rigs in relation to the merger between Keppel O&M and SembMarine, or a book value of $2.9 billion ex receivables. The final plans for the rigs will be announced together with the merger.
DBS Group Research analyst Ho Pei Hwa has kept “buy” on Keppel Corporation with an unchanged target price of $6.90.
“Our target price is derived based on: urban development valued at 0.9x P/BV, implying 25% discount to property revised net asset value (RNAV); [a] discounted cash flow (DCF) valuation for Tianjin Eco-city with 10% weighted average cost of capital (WACC); and connectivity/asset investment/infrastructure/others at 1x P/BV,” she writes.
She adds: “Keppel’s huge landbank of [around] 5 million sqm is held at low cost. Half of this is under development, progressively unlocking its RNAV over the next three to five years. Of the undeveloped landbank, 30% is earmarked for projects in Tianjin Eco-city, which is not reflected in our RNAV”.
Furthermore, she notes that Keppel’s share price has done well, with a 26% increase since end-January after it posted a strong set of results for the FY2021 ended December.
This was boosted by a generous dividend and share buyback exercise, says Ho.
“The widely anticipated definitive agreement relating to the yard merger, which would streamline Keppel’s operations to focus on its asset light businesses and sustainable solutions, should re-rate the stock further when formalised by end April,” she adds.
To her, a lower-than-expected en-bloc sales could pose downside risks to her forecast. “En-bloc sales are lumpy by nature, forming more than half of property profit in 2018 but only 10% in 2019.”
Finally, PhillipCapital analyst Terence Chua has kept "buy" on Keppel with an unchanged target price of $7.07.
"We valued the group based on the four new segments unveiled during Vision 2030 to better reflect the group’s reporting segments going forward. Our target price translates to about 1.0x FY2022 book value, in-line with its five-year average," Chua writes in his April 27 report.
To him, Keppel's 1QFY2022 revenue stood below his forecasts at 23.5% of his FY2022 estimates, with the drag coming from its Urban Development business.
On the proposed merger between Keppel O&M and SembMarine, Chua expects the former's modern jackup rig utilisation and day rates to improve as oil prices continue to rise.
"We expect Keppel O&M’s legacy rigs to be substantially monetised in the next three to five years on the back of the improving industry outlook. While nothing has been firmed up, we view the developments positively as it provides better clarity on the fate of its O&M unit. With the overhang removed, along with the divestment of its logistics unit, we believe Keppel will be re-rated," he says.
As at 10.30am, shares in Keppel are trading flat at $6.69.
