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Broker's take: DBS keeps 'buy' on Keppel, sees group stepping 'out of the woods'

DBS Group Research on Friday kept its "buy" call on Keppel Corp, saying that the conglomerate's property segment remains undervalued while the offshore and marine (O&M) business stands on the cusp of recovery despite a loss-making quarter.

"Out of the woods," said the brokerage, which has a S$10.20 target price on the stock.

DBS said Keppel's full-year earnings were below expectations, but that the property arm's steep discount to revalued net asset value (RNAV) is poised to narrow from the current 30 per cent to about 10 per cent, where its property peer CapitaLand is trading.

Half of Keppel's landbank is currently under development, and will realise its RNAV over the next three to five years, DBS said. Out of its remaining undeveloped landbank, 40 per cent is for projects in Tianjin Eco-City, which Keppel acquired in 2009 at less than one-tenth of the current land price, the brokerage said.

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On the O&M side, Keppel's contract wins in 2017 broke out of a declining trend to clinch S$1.2 billion worth of new orders, doubling over 2016. The momentum should continue into 2018 with S$3 billion new orders assumed, DBS said.

One-off financial penalties and related costs arising from the global settlement of the Keppel Offshore & Marine (Keppel O&M) corruption scandal in Brazil pulled the larger Keppel group into its first quarterly loss since quarterly reporting began in 2003. But DBS took that hit in stride, saying that the bribery incident was not expected to have any "major operational impact".

" Keppel has reassured investors that the global resolution brings an end to their bribery case in Brazil, and Keppel has put place enhanced compliance framework to prevent the recurrence of such incidents," DBS wrote.

In its latest quarter, Keppel took a S$619 million charge relating to Keppel O&M's cross-border settlement with criminal authorities in the United States, Brazil and Singapore over corrupt payments made by a former agent in Brazil. That sum included US$422 million (S$567 million) in fines and related legal, accounting and forensics costs.

Those items pulled Keppel into the red with a net loss of S$495.8 million for the three months to Dec 31, 2017. It was a significant reversal from a net profit of S$143.1 million in the corresponding period a year earlier.

Excluding the one-off charge, net profit would have come in at S$124 million, 13 per cent lower year-on-year.

Shares of Keppel stood at S$8.51 at 1.06pm, down seven Singapore cents.

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