Brokers' Take: DBS upgrades Keppel to 'buy', raises target price

DBS Group Research has upgraded Keppel to "buy" from "hold", and raised its target price to S$6.20, from S$5.85 previously.

Analysts remain upbeat about the company due to its "encouraging" Q1 operating results, the major floating production storage and offloading (FPSO) contract that is "almost in the bag", and its accelerating clean-energy transition into renewables and electric vehicles (EVs).

DBS Group Research analyst Ho Pei Hwa said that the key risk includes the lower-than-expected volume of en-bloc sales, which poses downside risks to the forecast. En-bloc sales are lumpy by nature, forming more than half of property profit in 2018 but only 10 per cent in 2019.

She noted that Keppel's Q1 business update featured improvements across all segments, and is expected to post higher net profit than the S$160 million from the year before.

Further, revenue grew about 70 per cent as home sales tripled from China and Vietnam property trading projects. Ms Ho estimates that divestment gains totalled approximately S$100 million in Q1, following the completion of three property disposals in China, Vietnam and UK, pointing to an "improving property market and sentiment".

In March, Sino-Singapore Tianjin Eco-City (SSTEC) sold a commercial and residential land plot in Tianjin Eco-City, which analysts estimate would yield between S$30 million and S$35 million in profit attributable to Keppel.

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DBS Group Research also noted that Keppel was able to beat two competitors with a lower tender price for the US$2.3 billion Brazil FPSO contract due to its cost competitiveness coming from "Keppel's familiarity operating shipyards in Brazil and lower hull costs partnering with Korean yeard Hyundai Heavy Industries".

The research house calls the cross-border partnership with Korean yard "game-changing", and said that the FPSO contract will double Keppel's orderbook to approximately S$6 billion.

Keppel is also set to develop, own and operate a solar farm with at least 500 MW capacity in Queensland, Australia, and complete it by 2023.

The company targets to grow its portfolio of renewable energy to 7GW by 2030, said Ms Ho. DBS said that the profit contribution could grow from between S$5 million and S$10 million per annum to S$100 million per annum, assuming its 7GW target is achieved.

KrisEnergy, to which Keppel's total exposure amounts to about S$420 million, had announced a set of disappointing production results from its oil and gas assets in Cambodia. In response, Keppel's share price slipped 3-4 per cent.

However, the analyst said that the debts are backed by first-rights claim on KrisEnergy's oil and gas assets. She noted that a significant portion of the amount should be recouped via asset sale if KrisEnergy goes under.

Taking into consideration Keppel's improving business outlook, DBS Group Research removes the 10 per cent discount to book value for the Urban Development segment. The raised target price of S$6.20 implies about one time its price-to-book value, or 0.5 standard deviation below the five-year mean.

Keppel's shares closed at S$5.45 on Friday, up 2.3 per cent or S$0.12.