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Broker's take: RHB keeps 'buy' on Keppel but lowers target price to S$7.60

RHB Research has maintained its "buy" recommendation on Keppel Corp, but lowered its target price for the conglomerate to SS$7.60 from S$7.80 after Monday's sharp fall in oil prices.

As at 10.40am on Wednesday, shares in Keppel were trading S$0.08 or 1.4 per cent down at S$5.62, representing a 26 per cent discount to RHB's target price.

The current price target takes into account lower expected earnings from Keppel's offshore and marine (O&M) unit, which has led to Keppel’s forecast net profit for FY2020 being cut by 13 per cent to S$893 million.

In a report dated March 10, RHB research analyst Leng Seng Choon wrote that the research house's average price for Brent crude in 2020 has been cut to US$47 per barrel from US$62.30 per barrel.

"If sustained at a low price, this could adversely affect Keppel’s O&M forward orderbook," Mr Leng said.

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Nonetheless, he pointed out the O&M unit's orderbook as at December 2019 stood at S$4.4 billion, higher than December 2018’s S$4.3 billion. which "is a plus".

At current prices, Keppel's valuations appear attractive, according to RHB.

Keppel's O&M segment is valued at 1.35 times forward price-to-book (P/BV), a discount to the five-year average of 1.56 times P/BV for peer Sembcorp Marine.

Its infrastructure segment is valued "conservatively" at 10 times forward price-to-earnings, while its property arm is valued at a 40 per cent discount to revalued net asset value, Mr Leng said.

Furthermore, Mr Leng added that Keppel's property segment, which is less affected by the recent slump in crude oil prices, should help support the conglomerate's share price and dividends.

Going forward, upside could come in the form of the approval of state investor Temasek Holdings' offer for an additional 30.6 per cent stake in Keppel at S$7.35 per share.

"If Temasek is successful in raising its stake to 51 per cent, the subsequent strategic review could lead to more value created for shareholders," Mr Leng said.

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