Divestment of SPC has also strengthened Keppel's balance sheet to engage strategic M&A growth. We believe the group’s restructuring efforts will be geared towards revenue/earnings which are less cyclical (vs SPC refineries).Accretive acquisitions which can harness synergies with Keppel Land and/or KIE may provide further upside to valuations.
At the same time, Infrastructure prospects has room to improve further, on back of recent contract wins and demand for green technology.
Our S$7.60 target price is based on a marginal discount to our per-share RNAV estimate of S$7.64, applying a 15% discount to the value of Keppel's investments in M1 and K1 ventures as we see Keppel as a passive investor in these ventures. For the group's O&M business, we use a target Dec FY10E P/B of 4x, which is the historical average PB in the recent cycle. We use P/B as our valuation approach for shipyard value as shipyard earnings have become less visible in the face of a slower orders momentum. We use 2010E valuation for the O&M sector as the bulk of the existing order book will be recognized by 2010. For Infrastructure we use ~10x FY10E P/E, in line with the industry average as earnings is set to grow from a low base; and we value Keppel Corp's 53% stake in Keppel Land based on target price for Keppel Land of S$1.94.
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