Brokers' take: DBS raises Keppel target price by S$2.20 to S$9.80

STOCK analysts at DBS have professed themselves unfazed by Keppel Offshore & Marine's half-a-billion-dollar fine for corrupt payments to officials in Brazil.

Sticking to a "buy" call, analyst Ho Pei Hwa bumped up the target price for parent Keppel Corporation to S$9.80 from S$7.60 previously in a report out on Monday.

Much of her optimism came from DBS' higher valuation of Keppel's property segment, which now makes up half of the group's bottom line as contribution from its offshore and marine segment waned in recent years from slumping oil prices.

The revised property valuation added S$1.57 to the target price, or about 70 per cent of the increase in DBS' fair-value estimation of the stock.

The DBS report pegged the property segment as "underappreciated and undervalued", noting - among other things - the group's "huge" land bank, including in China and Vietnam, and the nascent profitability of the decade-old Tianjin Eco-City project.

As for the unprecedented US$422 million (S$570 million) penalty it has agreed to pay, the research team said: "While we can't vouch for Keppel, we take solace in Keppel's long track record, proactive actions upon emergence of the incident, tightened internal controls and separation of the executives involved.

"Furthermore, the incident should not affect Keppel's ability to bid for future contracts.

"We have factored in the financial loss in our earnings model and valuations."

While the fines would eat into Keppel's net asset value to the tune of 31 Singapore cents a share, the DBS report said that the impact could be partially offset by the projected net gain of S$290 million from the impending divestment in Keppel Marina Zhongshan.

DBS also noted that the offshore and marine industry at large is enjoying a recovery in oil prices and a rebound in annual order wins for both Keppel and its rival Sembcorp Marine.

Each of the two companies is expected to secure S$2.5 billion of new orders in 2018, the report said.

The Trump administration's proposal to drastically expand offshore oil and gas drilling in United States waters was also touted as a tailwind for Keppel, with the amount of technically recoverable crude oil and natural gas at stake described as "a bonanza for oil companies".

If the move makes it past opposition from parties such as environmental groups, business associations and some lawmakers, then "the prospect of this large resource base could accelerate the demand recovery of rigs, particularly jackups, given the relatively shallow-to-mid depth waters", said the report.

But the report added that risks to Keppel's offshore and marine business include competition from foreign yards, especially in China and South Korea, as well as the possibility of more dismal oil prices.

Keppel shares were down S$0.04, or 0.52 per cent, at S$7.73, as at 11.50am, on a turnover of 1.41 million shares.