Brokers' take: DBS upgrades Keppel to 'buy', says O&M review could restore confidence

DBS Group Research has upgraded Keppel Corp to "buy" from "hold" following its recent price correction and given that the strategic review of its offshore and marine (O&M) arm will "shine some light at the end of the tunnel".

Keppel shares jumped 6.1 per cent or S$0.26 to S$4.56 as at 11.07am on Wednesday. This comes after the conglomerate on Tuesday said it has identified some S$17.5 billion in assets that can be monetised over time, and that it will commence a strategic review of its O&M business.

DBS has a 12-month price target of S$5.50 on Keppel. This represents a 28 per cent upside from the counter's Sept 29 close of S$4.30.

The stock has corrected about 20 per cent post Temasek's partial offer withdrawal, dragging its valuation to a near trough of 0.73 time price-to-book value, or two standard deviations below its five-year mean, wrote DBS analyst Ho Pei Hwa in a research note on Wednesday.

She added that Keppel's reaffirmation of capital recycling to unlock S$3-5 billion from identified assets over the next three years, along with the launch of a strategic review of its O&M business should restore confidence among investors.

"After the kitchen sinking H1 20, we believe the worst is now behind Keppel, operational improvements ahead should drive valuation rerating towards one standard deviation below mean, with return on equity inching up to estimated 7 to 8 per cent next year," said Ms Ho.

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DBS also believes that improving property sentiment is another catalyst for the counter.

Separately, CGS-CIMB has maintained its "add" call on the counter, with an unchanged target price of S$6.46.

CGS-CIMB analyst Lim Siew Khee noted that Keppel's O&M review could lead it to scale down its operations to focus on renewable energy. Meanwhile, inorganic options include mergers and disposals, and the brokerage noted it is not ruling out a merger of Keppel's O&M business with Sembcorp Marine.

The brokerage also expects to see accelerated efforts in Keppel selling its landbank or commercial buildings as part of its three-year plan to unlock assets.

"We believe monetisation plans could include landbank sale and injection of Singapore commercial properties into real estate investment trusts.

"Although this has been part and parcel of its previous asset recycling strategy, setting a hard target of S$3-5 billion makes the difference this time," said Ms Lim.