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Broker's take: Nomura maintains 'reduce' rating on Keppel Corp

NOMURA has maintained its "reduce" rating for Keppel Corporation, reiterating its target price of S$7.95 for the company that on Friday launched an offer to take its subsidiary Keppel Land private.

The rating, said Nomura analysts Wee Lee Chong and Abhishek Nigam, is due to the weak new orders outlook owing to a global oversupply of jackup rigs in 2015, and the potential consensus downgrades for Keppel Corporation's offshore and marine (O&M) earnings in FY2015/2016.

"We are reviewing our O&M earnings forecasts and target price for Keppel Corporation, with downside risk potential. This is due to the lower than expected net tangible assets and order book for Keppel Corporation's O&M division as of end-2014, and the potential increase in conglomerate valuation discount given the re-deployment of funds to acquire additional shares in KepLand vs the typical higher valuations given to the O&M business," the analysts said in a report.

"Indeed, we see Keppel Corporation's attempt to privatise KepLand as a negative catalyst to the stock," they added.

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The privatisation offer of KepLand is reasonable and accretive to shareholders, and signals Keppel Corporation management's longer-term view of the property business, said the report.

"Allocation of capital across businesses will also be relatively easier while KepLand is expected to benefit in the form of lower cost of funds owing to Keppel Corporation's diversified earnings streams and credit standing."

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