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Hot stock: Keppel rises 5.4% on return to profitability

Keppel Offshore & Marine O&M completed a converted floating liquefaction vessel in 2017 - KEPPEL CORP.jpg
As yard restructuring is much needed in this prolonged downturn, the review will "shine some light at the end of this long tunnel", said DBS Group Research.

INVESTOR optimism gave Keppel Corp's share price a boost on Friday, after the conglomerate announced it was back in the black for the July-September period versus the previous quarter's S$697.6 million net loss.

The stock gained 5.4 per cent or S$0.23 to reach a high of S$4.50 at about 11.26am. It then slowed slightly to trade at S$4.42 as at 1.47pm, up 3.5 per cent or S$0.15 from Thursday's close. About 7.4 million shares changed hands by then.

In August, Keppel shares had tumbled when Temasek Holdings abandoned its partial takeover offer for the company following its second-quarter loss.

In a report on Friday, DBS Group Research analyst Ho Pei Hwa said that all eyes are now on the offshore and marine (O&M) business, which is under strategic review.

Keppel has embarked on a recovery path, with its property sales improving especially in Singapore and China, while O&M activity is picking up.

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"A clearer Vision 2030 roadmap and an affirmation of capital recycling to unlock S$3-5 billion from identified assets over the next three years should restore confidence," Ms Ho wrote.

To accelerate the Vision 2030 roadmap, the group has established a transformation office, along with a 100-day plan to drive results across all segments.

DBS noted that the O&M strategic review could be concluded by the end of this year, which will be a potential rerating catalyst.

As yard restructuring is much needed in this prolonged downturn, the review will "shine some light at the end of this long tunnel", Ms Ho said. "We believe spinning off the (O&M) business would be deemed positive, allowing Keppel to focus on its other businesses."

Similarly, CGS-CIMB wrote that a full divestment of the O&M segment could be a rerating catalyst, although valuations may not be attractive in the current market.

CGS-CIMB analyst Lim Siew Khee said in a note that other possible outcomes of the strategic review include a reduced stake in Keppel O&M, retaining only the renewable-energy aspects of the business or merging it with Sembcorp Marine, which recently split from its parent Sembcorp Industries.

Since the onset of the coronavirus pandemic early this year, Keppel O&M has put in place cost management measures, which will reduce annual overhead costs by more than S$90 million starting from 2021. The group on Thursday said it is working on further cost cuts.

OCBC Investment Research on Friday said: "We have always held the view that there is value in the stock waiting to be unlocked, but the question is how and when."

"With management committed to undertaking steps to do this, investors will focus on the new opportunities that the group will seize - including renewable energy, data centres and smart urban solutions - and its execution ability which will translate to realised returns eventually."

OCBC, which has a "buy" recommendation and fair value of S$6.00, anticipates the O&M review will be concluded by early next year.

For the first nine months of this year, group revenue fell 10 per cent year on year to around S$4.8 billion.

And for the third quarter, net profit was "significantly lower" year on year, said Keppel.

All segments except for O&M were profitable and outperformed the management's expectations. While O&M remained in the red for Q3 and overseas property home sales slowed, the infrastructure, M1 and asset management businesses were resilient.

CGS-CIMB estimated that the O&M arm's revenue for the three months came in "flattish" on a quarter-on-quarter basis, at about S$261 million.

Keppel had reported that O&M revenue for the nine months amounted to S$1.1 billion, down from S$1.4 billion for the year-ago period.

CGS-CIMB believes O&M revenue could improve quarter on quarter for the last three months of this year as more workers return to the yard. The segment's active workforce in Singapore was 15,000 at the end of September, up from just 5,000 at the end of July.

Besides, the O&M arm has won about S$900 million worth of new contracts in the year to date, and 72 per cent of them were for offshore wind and liquefied natural gas projects.

As for the urban development segment, DBS noted that Keppel's huge land bank of about five million square metres is held at a low cost.

Half of this is under development, which will progressively unlock its revalued net asset value (RNAV) over the next three to five years, the research team said.

Of the remaining undeveloped land bank, 30 per cent is for projects in Tianjin Eco-city, which is not reflected in DBS's RNAV estimates.

DBS reiterated its "buy" rating on the stock and the price target of S$5.50. The counter is "trading at an attractive valuation near the trough of 0.7-time price-to-book-value (P/BV) ratio or two standard deviations below its five-year mean", the DBS analyst added.

CGS-CIMB kept its "add" call with a S$6.46 price target. The brokerage expects the shares to trade up to their long-term mean of 12.8-times 12-month forward price-to-earnings ratio or 1.9-times P/BV.

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