SINGAPORE (June 10): RHB Research is keeping its “buy” call on Keppel Corp with a lower target price of $7.33 from $7.92 previously.
In a Monday report, analyst Leng Seng Choon says, “We like Keppel for its potential for prime landbank-value unlocking in China and Vietnam. Its O&M division would see recovery in contract flows, with FPSO conversion jobs expected to pick up in 2019, after securing $1.8 billion of 2019 O&M orderbook YTD (exceeding $1.7 billion for FY18).”
In the mid-to-long term, the group is targeting ROE of 15%, by being a powerhouse of urbanisation solutions. It believes that this is a realistic target, given the average 17.7% ROE recorded from 2009 to 2018.
In Keppel’s recent results, its property division accounted for the bulk of the group earnings at 99% EBIT.
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“While government policies have tightened up in recent years, we believe its China property business would still yield significant profit in the coming years, as its business is focused largely in prime areas, namely, Chengdu metropolis, Greater Bay Area, Yangtze River Delta and Jing-Jin-Ji,” says Leng.
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Furthermore, the group has a huge overseas landbank unlocking potential, as it has about 3 million sqm of remaining residential area for sale in China, while in Vietnam, it is developing the Saigon Sports City township in a prime area near Ho Chi Minh City.
As for the group’s O&M division, the analyst believes its 2018 worst may be over, as he expects orderbook replenishment to be ramped up in 2019, driven by floating production storage and offloading (FPSO) conversion jobs from higher project sanctions (especially in Brazil and Mexico) as oil prices stabilise.
“Chances of winning the conversions, in our opinion, is high given Keppel’s impeccable track record in FPSO conversions. LNG-related projects should also support the O&M division,” adds Leng.
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Meanwhile, Keppel plans to unlock more value through capital recycling. As the analyst believes that the group possesses the capability to build assets for its clients, while moving to asset ownership through stake acquisition via its asset management business arm, Keppel Capital.
As at 10.55am, shares in Keppel Corp are trading 1.65% higher at $6.15 or 0.9 times FY19 book with a dividend yield of 4.4%.
