Keppel downgraded by UOB KayHian amid concerns over China property

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UOB KayHian downgraded Keppel Corp. to Hold amid concerns that China property sales face headwinds next year.

“Demand for property is growing increasingly speculative, and appetite for land sales is waning. The data suggests second half of 2018 property sales should stay resilient, though we are cautious on the outlook for 2019 and beyond,” the brokerage said in a note on Friday.

It noted that the new-home buyers appear increasingly speculative, pointing to data showing 50 percent of the purchases were for investment purposes, up from 38 percent in 2017.

“The continued price increase despite cooling measures, fueled by increasing speculative demand will likely spur further measures. Other China property developers are also accelerating their sales in order to improve cash flow and ease their liquidity crunch,” UOB KayHian said. “The increased supply pipeline and declining real housing demand could see current demand evaporate.”

It lowered its 2018-20 earnings estimates for Keppel’s property segment by 7 to 21 percent, on changes to its sell-through rate and average selling price assumptions, mainly on a 3-22 percent lower earnings assumption for China.

For 2018-20 core net profit estimates, UOB KayHian raised its 2018 estimate by 4 percent to S$526 million, but cut its 2019 estimate by 2 percent to S$792 million and lowered its 2020 estimate by 10 percent to S$985 million, it said.

It cut its target price for Keppel to S$7.37 from S$9.00, setting an entry price of S$6.60, after raising the RNAV (revalued net asset value) discount to account for the uncertainty in China. The RNAV discount is now a blended 35 percent, up from 20 percent previously, comprising a 40 percent discount for China, in line with the historical mean for listed China property developers, and a 20 percent discount for Singapore, Vietnam and others, it said.

UOB KayHian kept its valuation multiples for the offshore & marine, infrastructure and investment segments unchanged.

The stock ended Friday down 2.35 percent at S$6.65.

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