KGI upgraded Keppel Corp. to Overweight, saying weak earnings this year have likely been priced in.
“We see value in its stock after the recent share price weakness,” KGI said in a note Monday.
Last week, Keppel reported its third quarter net profit dropped 30 percent on-year to S$159 million, mainly on year-ago gains from divesting a commercial development in Beijing and higher net interest expense.
KGI said the results missed its expectations, with nine-month earnings making up only 62 percent of its full-year forecast.
The brokerage said it expected the offshore and marine segment’s operating margins to remain weak this year and next amid intense competition for projects.
“We have not factored in a meaningful earnings contribution from its O&M segment until 2021, a view reinforced by management,” KGI said.
“There is still significant global overcapacity in the shipbuilding industry and competition is only expected to increase as Chinese and South Korean shipyards continue to consolidate, thus creating industry heavyweights with a significantly larger footprint,” KGI said.
The brokerage said the competition makes a stronger case for Keppel’s offshore and marine segment to merge with Sembcorp Marine, especially with the two companies resolving their issues with Brazil’s Sete Brasil and removing a balance sheet overhang.
However, analysts have floated the possibility of that combination previously, without the companies indicating much interest.
KGI pointed to some potential risks for Keppel, with the property segment now contributing the largest share of ts profits, making it vulnerable to real estate turmoil in key markets such as China and Singapore.
“Hopes for a property rebound in China may be premature as regulators seem intent to maintain a stable property market,” KGI said. “On a positive note, Singapore’s property market is showing signs of a recovery.”
KGI nudged its target price for Keppel shares up to S$7.44 from S$7.43.
Shares of Keppel ended Friday down 2.01 percent at S$5.84; Keppel requested a trading halt on Monday.