Keppel Corp - DBS Research 2016-01-22: Sete Brasil provisions push O&M into the red

KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corp - Sete Brasil provisions push O&M into the red

FY15 PATMI in line; provisions for Sete Brasil projects offset by stellar property earnings and revaluation gains
Declared 22 Scts final DPS, bringing total FY15 DPS to 34 Scts; dividend payout cut from 50% to 40%
Challenging O&M outlook; worst is over for Infrastructure segment; optimistic on property sales in China and Vietnam

Keppel reported PATMI of S$404.8m in 4Q15, bringing FY15 bottomline to S$1.5bn, largely in line with our expectations but 7% ahead of consensus.
Keppel made provisions of S$230m for the Sete Brasil projects in 4Q15, after accessing the construction progress, payments received, receivables from Sete Brasil and payables to vendors etc. This was however offset by strong earnings from property segment and revaluation gains on investment properties.
DPS declined from 48 Scts in FY14 to 34 Scts in FY15 with the lower earnings and dividend payout ratio of 40% (vs 50% previously).
Management guided that 40% will be a sustainable level in the near term.

O&M posted net loss of S$61m in 4Q15, the first quarterly loss since Keppel O&M was established in 2001. Excluding the provisions, O&M’s PATMI would have been flat q-o-q. In fact, O&M’s ex-provision operating margin was impressive at 17.1%. Coupled with the slower orderbook drawdown, FY15 O&M PATMI nosedived 54% y-o-y to S$481m.
Infrastructure segment’s PATMI declined by 43% y-o-y to S$256m in FY15, largely attributable to the final provisions made for the EPC projects.
Property segment was the silver lining, registering an astounding PATMI of S$368m in 4Q15 (+156% q-o-q), led by strong property sales in China and Vietnam, and boosted by revaluation gains on investment properties. Full year PATMI surged 45% y-o-y to S$701m.

O&M’s orderbook dwindled to S$9bn as of end-2015, from S$12.5bn a year ago given sluggish order wins of S$1.8bn in 2015. While demand for newbuild rigs has been dampened by low oil prices and supply glut, Keppel continues to see healthy enquiries for conversion jobs and gas-related solutions.
Keppel completed 91%/70%/40%/21% of the first four semisubmersibles for Sete Brasil. The last two units achieved minimal progress of < 10%. Construction work has halted since end- 2015 pending the restructuring of Sete Brasil.
The worst is over for Infrastructure segment with the delivery of all EPC contracts. The logistic and data centre assets are among the bright spots.
Management remains optimistic on the property markets in China and Vietnam. These two markets contributed 72% and 20% respectively to Keppel’s 4,570 homes sold in 2015. Higher home sales are expected in 2016.

We are reviewing our forecasts and target price but likely to maintain our HOLD call on Keppel.

Janice CHUA DBS Vickers | Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2016-01-22

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 99999 Same 7.40