Brokers' take: Exit from rig business to benefit Keppel, say analysts

ANALYSTS believe that Keppel Corp's decision on Thursday to exit the rig business and restructure Keppel Offshore & Marine (Keppel O&M) could be a catalyst for growth. But quite a few also lowered their target prices for the stock.

Both UOB Kay Hian (UOBKH) and CGS-CIMB remain positive on Keppel's outlook but lowered their target prices on the conglomerate. UOBKH's target price was lowered to S$6.10 from S$6.30, and CGS-CIMB's to S$6.40 from S$6.46.

In a research note on Friday, UOBKH said it is maintaining its "buy" call on Keppel. The company's net profit decline of 13 per cent, following a hit from impairments, was better than expected. Analyst Adrian Loh also believes the exit strategy is a positive move for Keppel as he expects the outlook for the rig-building sector to remain bearish for the next year or so.

"Rig day rates and utilisation rates for all asset classes declined throughout 2020 despite starting the year with already poor numbers. In our view, these figures are not expected to recover in the medium term," said Mr Loh, who noted that management has not ruled out other inorganic options to help streamline operations.

CGS-CIMB also maintained its "add" call on Keppel in its report on Thursday. The research team is optimistic about the future of Keppel O&M as it focuses on floating infrastructure and infrastructure-like projects that can deliver predictable streams of cash flow, including renewable projects.

Analyst Lim Siew Khee noted that Keppel had successfully divested S$1.2 billion worth of assets since Oct 20, with an estimated gain of more than S$120 million. She believes the group has potential to grow if it continues divesting, chartering rigs, and clinching more renewable orders. She nevertheless highlighted that there are risks to investors from a prolonged O&M restructuring.

DBS, meanwhile, had a less positive outlook as it downgraded its "buy" call to "hold". It nevertheless revised its target price to S$5.85 from S$5.50 previously.

While analyst Ho Pei Hwa opined that the group is en route to recovery as economic activities pick up with gradual vaccination rollouts, she believes investors should await positive indicators as the conglomerate restructures.

Separately, OCBC maintained its "hold" call on the conglomerate and lowered its fair value to S$5.20 from S$6. The change in its call reflects the reduced upside potential from here, while the lower fair value comes following Keppel's reorganisation of its business segments.

"At current levels, we see most of positives priced in," OCBC said in a report on Friday.

Keppel shares were trading S$0.44 or 8.1 per cent lower at S$5.02 as at 3.44pm on Friday.