By The Edge Singapore

Felicia Tan Published on Sat, Jun 26, 2021

Analysts from DBS Group Research and UOB Kay Hian have kept their “buy” calls on Keppel Corporation after the group announced that it was in talks with Sembcorp Marine (SembMarine) on a potential merger between Keppel O&M and SembMarine on June 24.

The research team at OCBC Investment Research has upgraded its call to “buy” from “hold” previously. It has also upped its fair value estimate to $6.33 from $5.50.

Meanwhile, DBS and UOB Kay Hian have kept their target price estimates of $6.20 and $6.37 respectively.

To DBS analyst Ho Pei Hwa, the yard combination has been a long-awaited one.

While the proposal is non-binding, should the merger come to fruition, completion is likely to take place in 2022, Ho notes.

“If completed, the potential combination would create a stronger player – Keppel’s branding and market leadership + SembMarine’s world class facilities + both yards’ engineering and R&D strength – to capitalise on growing opportunities in the O&M, renewable and clean energy sectors,” writes Ho in a June 25 report.

The merger will also allow Keppel to focus on its other businesses and opportunities in becoming a purer urbanisation and sustainability player.

Keppel has, so far, gained traction in the renewable/gas solutions that now contributes between 70% to 80% to its O&M’s business’ orderbook.

In addition, Keppel will operate its first solar farm with over 500MW capacity in 2023. The group aims to raise its renewable energy portfolio to 7GW by 2030.

Ho’s target price estimate implies a price-to-book value (P/BV) of 1.0 times.

It is also based on Keppel’s Urban Development business that’s valued at 0.95 times P/BV, implying a 25% discount to Property revalued net asset value (RNAV); discounted cash flow (DCF) valuation for Tianjin Eco-City assuming 10% of its weighted average cost of capital (WACC), as well as connectivity/Asset Investment/Infrastructure/others at 1 times P/BV.

Keppel also has a huge land bank of around 5 million sqm, which 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.”

On this, Ho has thus urged investors to not “miss a good entry point” for the counter, which has been overlooked as an undervalued recovery play.

“The worst is behind the group after all the write-downs that took place last year and expected to be recognised in 1HFY2021,” Ho writes.

“We have seen operational improvements in 1QFY2021 and the trend should continue. The latest proposal to spin off Keppel O&M is an imminent re-rating catalyst,” he adds.

However, he warns that lower-than-expected en bloc sales may pose downside risks to forecasts.

“En-bloc sales are lumpy by nature, forming more than half of property profit in 2018 but only 10% in 2019,” says Ho.

The research team at OCBC are positive on Keppel Corporation’s multi-business strategy; the group’s property business continued to support earnings despite a downturn in its offshore & marine segment.

“Infrastructure remains a steady contributor while Investments is expected to see gains from asset disposals. Management has reaffirmed its Vision 2030 strategy and identified assets with a total carrying value of $17.5 billion that can potentially be monetised over time and channelled towards growth initiatives,” says the team.

“Over $3 billion to $5 billion of this would be monetised over the next three years,” it adds.

Keppel Corporation has also fared well in labour management, health and safety, governance and opportunities in clean tech, in terms of environmental, social and governance (ESG) performance, notes the team.

It has incorporated an ESG premium in its valuations in addition to its higher fair value estimate.

Potential share price catalysts for Keppel include accretive acquisitions in the region at “reasonable valuation multiples”, successful monetisation of undervalued assets, as well as a recovery in property prices in its key markets of Singapore, China and Vietnam.

That said, a deterioration in the global economy, acquisition and integration risks, execution hiccups, as well as government regulations and policies which may impact the property market may pose downside risks to the counter, says the team at OCBC.

UOB Kay Hian analyst Adrian Loh says he finds the developments as “generally positive” as it signals that Keppel is moving closer to its Vision 2030 goal of generating more earnings via recurring income and sustainable solutions.

Keppel will still have a small exposure to the offshore and marine industry via its 20% stake in the Assetco.

Loh’s valuation has placed a conservative value on Keppel O&M at $100 million, since its book value stood at $659 million as at end-FY2020.

“A divestment in excess of this would be accretive to our target price,” he writes.

Keppel Corporation’s valuations also appear inexpensive to Loh at this point in time.

The group’s share price has fallen from its year-to-date high of $5.73 to trade at 0.9 times P/B, which is -1 standard deviation (s.d.) below its five-year average P/B of 1.0 times.

“Should regional economies continue to recover well from the Covid-19 pandemic in 2021, we believe that this gap can further close in the coming quarters,” writes Loh.

“Going forward, Keppel’s China property segment should see better sales volume on a y-o-y basis given the low base in 1HFY2020 while its infrastructure segment will have a full half-year of contribution in 1HFY2021 from the Marina East desalination plant which started operations in Jun 2020,” he adds.

Share price catalyst factors identified by Loh include the finalisation and the disclosure of the valuation of the O&M assets that will be divested.

The announcement of the partial or full sale of Keppel’s Southeast Asian or Australian logistics businesses, as well as earnings-accretive acquisitions in the property space in China and Vietnam are also catalysts to Keppel’s share price, says Loh.

Shares in Keppel Corporation closed 29 cents higher or 5.7% up at $5.40 on June 25, or 0.8 times P/BV, according to OCBC’s estimates.