DBS Vickers 2015-08-06: Keppel Corporation - More Value Unlocking Actions? HOLD.

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More Value Unlocking Actions? 

• HOLD for decent dividend yield and potential value-unlocking corporate actions. 
• Keppel remains committed on paying out 50% of its earnings to reward shareholders. 
• Although DPS could moderate with earnings decline, yields remain fairly attractive at 5-6% based on our forecasts. 
• Upside surprises could come from gains from disposal / divestments. 
• In addition, infrastructure should recover with the delivery of all EPC contracts, mitigating the weakness from O&M. 

Offshore & Marine business weighing the group down. 

• Order wins in 1H15 stood at S$1.5bn, less than half of 1H14’s S$3.2bn and considerably lower than FY12 and FY13 full-year wins of ~S$10.0bn. 
• Keppel O&M’s net orderbook is shrinking, implying declining top-line and earnings ahead. 
• In 2Q15, Keppel O&M saw its PATMI fall 36% y-o-y and 15% q-o-q due to revenue declines of 23% y-o-y and 18% q-o-q, led by deferments in Transocean and Petrobras projects. 

Property business is a mixed bag; infrastructure should bottom out. 

• Singapore home sales remain muted, but the Chinese market seems to be picking up. 
• YTD GFA sold across developers in China is up 24.2% over 2014’s slump, although ASP pick-up has been varied, with mainly Tier 1 cities seeing pricing gains. 
• Overall, Keppel sold over 1,800 homes in 1H15, with 1,170 coming from China alone, marking an improvement over the 1,300 total sold in 1H14. 
• For infrastructure, with the handover of both phases of the Greater Manchester EPC project and the Doha North sewage treatment project having incurred its final provision of just under S$200m in 2Q15, Keppel Infrastructure should see its profitability improve. 

Valuation: 

• Our TP of S$8.14 is based on sum-of-parts : 
  1. O&M segment is valued at 10x price-to-earnings (PE) ratio on FY15 earnings, 
  2. infrastructure is valued at 10x PE on FY15 earnings, and 
  3. market values/estimated fair values are used for listed subsidiaries and directly-owned property projects. 

Key Risks to Our View: 

• O&M segment could fare worse than expected. 
• We forecast revenues from Keppel O&M falling to the ~S$6.5bn and S$6.9bn levels in FY15 and FY16 respectively, from S$8bn previously. 
• Continued depletion of the order book coupled with deferments could pose downside to our forecast.

Analyst: HO Pei Hwa

Source: http://www.dbsvickers.com/