UOB Kay Hian analyst Adrian Loh has maintained his “buy” rating on Keppel Corporation on September 23, a day after Keppel Offshore & Marine (O&M) reported that it has scored two contracts worth a total of $200 million.
See: Keppel O&M secures two contracts worth a total of $200 mil
The order win, while “relatively small”, enables the company to generate much-needed cashflow for its O&M division, Loh says.
“In our view, there will be more orders to come in the near to medium term from Manson as well as other clients. We note that KEP’s CEO of Offshore & Marine (O&M) hinted at further orders from Manson in particular; the 115-year old company has marine construction, dredging, offshore and heavy-lift operations throughout the US, on both the east and west coasts,” Loh added.
Year-to-date, Keppel Corporation has secured a total of $307 million in new orders compared to no orders for Sembcorp Marine and US$714 million ($972 million) for Yangzijiang Shipbuilding, which also has US$1.3 billion options in hand.
On August 10, Temasek Holdings announced that it will invoke the material adverse change (MAC) pre-condition, and the partial offer will not proceed. Since then, Keppel Corp’s share price declined from $5.40 immediately before the withdrawal of the offer, to its closing price of $4.12 as at September 22.
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“This 24% share price decline (vs the STI’s decline of 3%) equates to a loss of $2.36 billion in market capitalisation which we view as overdone. We continue to believe that in the medium to long term, consolidation within the Singapore shipyard sector is inevitable given its fragmented nature vs its Chinese and Korean competitors,” says Loh.
“Consolidation is made all the more urgent by the fact that both Keppel Corporation and Sembcorp Marine face bearish industry conditions, which will last for at least the next 12-18 months, in our view. One of the many options for consolidation of the Singapore yards may take the form of a Temasek-led buyout of Keppel Corporation’s O&M segment and subsequent re-injection into Sembcorp Marine,” Loh adds.
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As such, Loh has lowered his earnings estimates for Keppel Corp for 2020-22F. Accordingly, he has also reduced his target price on the counter to $6.30 from $6.70.
As at 12.22pm, shares in Keppel Corporation are trading 4 cents higher, or 1.0% up, at $4.14.
