Keppel Corp - Outlook excites

Keppel remains our top pick in the O&M sector. We believe SPC’s divestment has not only benefited Keppel materially, but also created other new opportunities: (1) becoming PetroChina’s preferred yard and (2) entering into joint collaborations to acquire upstream assets or build midstream/downstream (gas) infrastructure. Furthermore, we think the cash proceeds will strengthen Keppel’s balance sheet and allow it to explore M&A interests, particularly for expansion of Brazilian presence, integration of O&M expertise with upstream assets and pursuit of new infrastructure ventures. The strategic significance and outlook appears exciting, in our view. As such, we reiterate our BUY call on Keppel with a target price of S$8.60, based on sum-of-the-parts valuation.

SPC’s sale brings future benefits. We think the divestment of Keppel’s SPC stake to PetroChina represents a win-win partnership for both parties. For one, Petrochina could utilise Keppel’s shipyard when it expands and/or upgrades its offshore facilities for deepwater exploration and production purposes. In addition, we expect more synergistic activities to occur in the medium to long term, such as joint collaborations to secure potential upstream assets. In addition, we think Keppel could leverage on PetroChina’s extensive platform to build up the former’s infrastructure/energy/utilities business in China, given PetroChina’s dominance in China’s gas transmission network.

Entrenching Brazilian presence with possible yard expansion. Upstream reported last week that Brazilian construction group WTorre and Keppel were closing in on an agreement that would give Keppel a 70% stake in the Estaleiro Rio Grande (ERG) yard in southern Brazil. As the ERG facility was initially established by Petrobras, we believe its acquisition would bolster Keppel-WTorre’s bid to clinch Petrobras’ tender for the hull construction of eight floating production, storage offloading (FPSO) vessels.

Value creation in the Upstream business? As SPC’s Chairman and Keppel’s current CEO, Mr Choo Chiau Beng spearheaded SPC’s maiden venture into the upstream oil and gas business in 2000. Given the business’s steady stream of revenue, we do not rule out Keppel acquiring new upstream assets. We also see potential synergies with Keppel’s rig building capabilities, as well as strong relationships with international drillers and oil field operators.

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