Keppel: KEP’s share price declined sharply recently due largely to its high correlation with oil prices and uncertainty relating to its major contract with Sete Brasil. The group is currently trading at a P/B of 0.8x, below its GFC low of 0.95x and moving towards its Asian crisis lows of 0.28x, which was impacted more by the property business then.
Keppel is highly correlated with oil prices (R Sqr: 0.86), and the house believes the focus will increasingly be on Brazil where major customer Sete Brasil is facing funding problems with payments to KEP halted since Nov 2014. Deutsche highlights if these contracts are cancelled, KEP’s 2016 earnings may decline by 7-12%. There could also be other related charges/expenses, including legal and/or redundancies etc.
All this said, Deutsche has a Buy call and a $7 TP. The house believes that 2H may be a good time to bottom fish, acknowledging that share price faces strong headwinds for now.
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