• Singapore residential exposure accounts for <10% of RNAV
• Maintain BUY; TP reduced to S$9.10 Read More
Reiterate BUY; TP reduced to S$9.10, as we widened the RNAV discount to 25% (previously 10%). This is in line with peer CapitaLand, reflecting the recent Singapore residential curbs. The property measures should have limited impact on Keppel, whose Singapore residential exposure forms only <10% of RNAV. We continue to favour Keppel as a safer proxy to ride the O&M recovery, given its multi-pronged businesses. Keppel’s decent dividend yield of 3% (based on 40% payout ratio) also lends support to its share price.
Where we differ: Positive on Tianjin Eco-City. Keppel’s huge historical land bank of ~6.5m sqm is held at a low cost. Half of the land bank is currently under development, progressively realising its RNAV over the next 3-5 years. Out of its remaining undeveloped land bank, 40% is for development projects in Tianjin Eco-city, which Keppel acquired in 2009 at less than one-tenth of the current land price which has yet to be reflected in our RNAV. In addition, the ongoing portfolio rebalancing exercise will unlock values of completed projects.
O&M on the cusp of recovery. O&M’s contract wins in 2017 bucked the declining trend as the division clinched S$1.2bn worth of new orders, which doubled over 2016. The momentum should continue into 2018 with S$3bn new orders assumed. YTD, Keppel has won ~S$840m new contracts. New orders are expected to come from gas and FPSO projects buoyed by sustained oil prices above US$70/bbl. The recovery in new orders towards our assumption could prompt further re-rating of the O&M business.
Our TP of S$9.10 is based on sum-of-parts valuation:
(1) O&M segment is valued at 2.4x P/BV,
(2) infrastructure at 15x PE on FY18F earnings,
(3) property segment at 25% discount to RNAV,
(4) investment (Keppel Capital) at 15x FY18F earnings, and
(5) market values/estimated fair values are used for listed subsidiaries. Our TP implies 1.3x FY18 P/BV.
O&M segment could fare worse than expected. We forecast annual revenues from Keppel O&M to fall to the ~S$2-4bn level in FY18-19, from S$7-8bn during FY12-14. If contract flows do not come through as expected, continued depletion of its orderbook could pose downside risks to our forecast.
Source : DBS Group Research