Keppel O&M focuses on new and LNG orders as O&M sector breaks even in 1Q

SINGAPORE: OCBC is maintaining its “buy” on Keppel Corp with a fair value estimate of $7.36 given the stock is trading at 1.0x book, below its trough of 1.2x during the 2008 financial crisis.Our revised fair value estimate of $7.36, down slightly from $7.40 after updating the values of Keppel’s listed entities, implies a P/B of 1.1x says analyst Low Pei

Our revised fair value estimate of $7.36, down slightly from $7.40 after updating the values of Keppel’s listed entities, implies a P/B of 1.1x says analyst Low Pei Han in a Friday report. This gives the stock an upside potential of about 15%.

In 1Q17 ended March, Keppel reported a 28.4% y-o-y fall in revenue to $1.25 billion but a 23.7% rise in net profit to $260.4 million which accounted for 29% of OCBC’s full-year estimate.

But this was bumped up by one-off items such as $46 million of writeback of impairment of investments, $32 million gain on disposal from the sale of 80% interest in PT Sentral Tunjungan Perkasa, as well as $44 million gain from the sale of interest in GE Keppel Energy Services and City one Development (Wuxi) Co.

We estimate recurring net profit of about $113 million, dragged [down] by the offshore marine segment which broke even in 1Q17, says Low.The property division, which has lumpy quarterly contributions, saw a 48% y-o-y fall in revenue to $262 million with lower revenue from China and Singapore.

Looking ahead, management sees many opportunities in the gas market, especially in the area of Keppel-built carriers and regasification units can be deployed alongside small gas-fired power units.

Keppel is also re-purposing its offshore technology for applications in other areas including floating infrastructure assets.

Low says it is already a well-known fact that the O&M division is undergoing a rough patch, hence negative news related to impairments might just be taken in stride by the market. What is important now will be the flow of new orders.

We are valuing the O&M segment based on 1x P/B, given that we do not expect a quick recovery in new order flows, says Low.While there is unlikely to be any demand for newbuild rigs, the analyst says there remains the possibility of production-related orders, as well as FLNG orders.Shares of Keppel are up 7 cents at $6.62.

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