SINGAPORE (Sept 13): OCBC Investment Research is maintaining its “buy” call on Keppel Corporation at a fair value estimate of $7.36 on the notion that it is well positioned to benefit from opportunities in Indonesia’s small-scale liquefied natural gas (LNG) market.
The group last week announced that its offshore and marine (O&M) unit had entered into a heads of agreement (HOA) with Pavilion Energy and Indonesia’s state-owned PT Perusahaan Listrik Negara to explore opportunities in the development of small-scale LNG distribution in West Indonesia.
See: Keppel to explore joint development of LNG solutions in Indonesia
In a Wednesday report, lead analyst Low Pei Han says she is optimistic on Keppel Corp’s potential to benefit from Indonesia’s gas-to-power initiative, which has recently seen PLN develop gas-fired distribution generation in several locations.
PLN is further seeking to build small-scale LNG terminals along the archipelago.
“Should more come to fruition, this would translate to demand for small LNG carriers, presenting opportunities for Keppel Corp, which can also provide other solutions such as FSRUs and power barges. Recall that in May this year, Keppel secured $103 million worth of contracts to build two LNG carrier vessels with options for three more from Stolt Nielsen Gas,” comments Low.
Echoing the views of Wood Mackenzie, the analyst sees Indonesia’s small-scale LNG market as a new growth segment that offers interesting opportunities amid lacklustre demand in the traditional LNG market.
“In Indonesia, many regions suffer from inadequate power supply. However, the country’s near 260 million population is spread across an archipelago of 17,504 islands, making it difficult to build centralised generation outside Java and Sumatra. Meanwhile, similar opportunities may arise in other South-east Asian countries and the Caribbean islands, as they share similar geographic settings,” she adds.
That being said, the analyst highlights how implementing small-scale LNG works would entail higher costs – and also deems it a more technically and logistically challenging option.
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She emphasises that time and investments will be required for the rollout of infrastructure and other developments, and therefore she does not expect immediate significant orders to replace the void caused by the absence of jack-up rig projects in Keppel’s orderbook.
“Keppel Corp’s property and investments divisions should be expected to support earnings, driven by China’s ongoing upcycle and Singapore’s impending property market recovery,” says Low.
OCBC is forecasting group revenue of $5.5 billion for FY18F, implying profit attributable to shareholders of $820 million.
As at 11.55am, shares in Keppel are trading flat at $6.27 equivalent to 15.9 times FY17 forward earnings.
