Why Keppel is still poised for growth despite Q2 weakness
Top investment brokers are expecting a 25% share price increase for Keppel Corp in the next 12 months.
Singapore marine and property conglomerate Keppel Corporation (SGX: BN4) is due to release its Q2 2020 financial results on Thursday 30 July 2020.
Below, we identified three key things that investors should pay attention to ahead of the report.
Keppel Corp’s share price is down 5.5% since Q2 guidance
The Keppel stock has declined as much as 6% since Friday 24 July, the same day that the group provided a soft profit guidance for the upcoming Q2 2020 earnings.
On Friday itself, Keppel's share price fell over 4% to a three-month low following the preview.
As at 13:05 SGT on Tuesday 28 July 2020, Keppel shares are trading at S$5.66 each, which is still some 5.4% below Thursday 23 July’s closing price.
IG’s market analysis show that ‘sells’ form 50% of all trades on the Keppel counter so far this week. Nevertheless, 91% of IG client accounts with open positions in this market are still expecting share price to rise.
On a year-to-date basis, Keppel’s market capitalisation is down by over 16%.
Analysts see more upsides for Keppel stock
Keppel currently has an average stock rating of ‘buy’ from 12 brokers polled by Refinitiv.
Earlier this month, UOB analyst Adrian Loh called a ‘buy’ on the stock alongside a 12-month share price target of S$7.15. This represents an upside of 25.2% from the last traded price.
Loh cited two main factors for his recommendation. Firstly, he stated that Keppel could potential achieve a long-term return on equity of 15% and a ‘high-single-digit’ return on invested capital as indicated in the company’s Vision 2030.
Next, he believes that Temasek’s offer to purchase a majority stake in Keppel remains intact, with the sovereign wealth fund’s position on long-term investments.
Still, the stock is not without its downsides, Loh added. He said that risks ahead include a lower-than-predicted dividend pay-out, as well as negative developments regarding the group’s Swedish subsidiary Floatel’s ongoing impairment review.
Meanwhile, RHB analyst Leng Seng Choon named Keppel his ‘top pick’ for the O&M sector, while maintaining a ‘buy’ rating and a share price target of S$7.30.
He said that the company is likely to still see ‘respectable contributions’ from its non-O&M sectors, such as property which he believes could still drive profitability.
Keppel says Q2 earnings will be ‘significant and adversely impacted’
The group, whose core businesses are in offshore and marine, as well as infrastructure and property development, had stated in last Friday’s Singapore Exchange filing that its earnings for the second quarter of 2020 ‘will be significantly and adversely impacted’ due to Covid-19.
‘The Covid-19 pandemic has severely impacted the global economy and brought about significant market volatility and uncertainty, including a sharp reduction in global demand for oil and in oil prices,’ the group said in the note.
‘Amidst the highly volatile environment and low oil prices, oil majors are curtailing exploration and production spending, which has adversely impacted day-rates and utilisation rates of the O&M (offshore and marine) industry generally and the group’s O&M business more specifically.’
As such, Keppel revealed that it will recognise material impairments pertaining mainly to the O&M business in its Q2 fiscal 2020 results.
It is also worth noting for potential investors that Keppel’s FY2019 net profits attributable to shareholders at S$707 million had fallen below analyst estimates of S$713 million, albeit slightly.
Earnings per share (EPS) for the year at S$0.39 was also below analysts’ estimates of S$0.44 per share. Year-on-year, EPS is down 26% from 2018.
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