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Keppel Corporation - UOB Kay Hian 2016-01-22: 4Q15: Property Shores Up Earnings, Upgrade To BUY On Valuation

Keppel Corporation - UOB Kay Hian 2016-01-22: 4Q15: Property Shores Up Earnings, Upgrade To BUY On Valuation KEPPEL CORPORATION LIMITED BN4.SI 

Keppel Corp (KEP SP) 4Q15: Property Shores Up Earnings, Upgrade To BUY On Valuation 

  • 2015 net profit came in 7% higher than our forecast primarily due to higher-than-expected property earnings. 
  • The O&M unit suffered a loss owing to a S$230m provision for Sete Brasil, and saw deferments of another five units. 
  • Property formed 46% of 2015 net profit, and will be Keppel’s growth driver for 2016-18. We tweak our earnings estimates. 
  • Upgrade to BUY. Current valuation implies a 6-7% yield stock, with the O&M business for free. Target price: S$6.05. 


RESULTS 


 4Q15’s net profit above our expectation by 7%. 

  • Keppel Corp (Keppel) reported a net profit of S$404.8m (-44% yoy) for 4Q15 and S$1,524.6m (-19% yoy) for 2015. 
  • Full-year net profit was 7% higher than our forecast of S$1,428m due to higher-than-expected property earnings. 
  • Keppel has declared a final DPS of 22.0 S cents, lower than 2014’s 36.0 S cents. 
  • Total 2015 DPS (1H15: 12.0 S cents, 1H14: 12 S cents) amounted to 34 S cents (2014: 48 S cents), translating to a payout of 40%, lower than 2014’s 46%. 

 Higher property earnings offset lower O&M earnings. 

  • 4Q15’s results included property revaluation gains amounting to S$129m. However, a provision of S$230m was made in the O&M segment relating to the Sete Brasil projects. This provision was made after assessing the construction progress, payment status and amounts due to vendors among other areas. This resulted in a 4Q15 loss of S$60m for the O&M segment. 
  • Keppel said milestone payments totalling US$1.3b (S$1.8b) have been collected from Sete Brasil. Management believes the provision to be adequate. 
  • Excluding this provision, O&M operating margin would have been a high figure of 17.2% (3Q15: 12.2%, 2Q15: 12.3%, 1Q15: 12.0%). 

 Update on jack-up rig deliveries. 

  • The delivery of five drilling jack-up rigs has been pushed from 4Q15 to 2016. Three belong to Grupo R, one from Peforadora Central, and one more from FTS Derricks (Falcon Energy). Two of the Grupo R units will be delivered in Feb 16 as they have secured drilling contracts with PEMEX. Delivery of the third Grupo R unit and FTS’s unit shifted slightly to the right in 2016. 

 Property made up 46% of Keppel’s 2015 net profit. 

  • The property unit, bolstered by Keppel’s strategic acquisition of Keppel Land in early-15, shows management’s foresight heading into this downturn. 
  • Contributing 46% of Keppel’s 2015 net profit, the business unit saw 2015 net profit rise 45.3% from S$482m to S$701m. The strong performance was driven by a near doubling in home sales from 2014, with 4,570 homes sold in 2015 (China: 72%, Vietnam: 20%). 
  • In a sense, the acquisition of Keppel Land was the ballast that stabilised the ship. 

 Strong growth expected for property in 2016-18. 

  • The business unit is expected to continue seeing strong growth from its key markets China and Vietnam going into 2016- 18. 
  • Of the 18,711 homes it plans to launch over 2016-18, China and Vietnam will respectively make up 61% and 19% of launches. Both markets continue to experience strong demand for housing due to favourable monetary conditions and improved sentiment for housing. 
  • Also fuelling the pipeline is the opening of Saigon Centre Phase 2 in Ho Chi Minh City and the 431-room Hotel Sedona Yangon Inya Wing in Myanmar this year. 


STOCK IMPACT 


 Multi-business model cushions O&M downturn. 

  • Despite a challenging O&M environment, Keppel reported a stellar profit for 4Q15. This clearly demonstrates the virtue and resilience of a conglomerate business. 

 Dividend payout ratio reduced, but yields still attractive at 6-7%. 

  • While payout ratio for 2015 fell to 40% from 46%, this remains in line with management’s guidance of 40- 50%. 
  • Dividend cuts are to be expected as part of prudent business management. 
  • Despite the reduction, Keppel still yields highly attractive dividend yields of 6-7%. 

 Current share price implies a zero valuation for the O&M business. 

  • Our revised target price of S$6.05 values the O&M business at 2016F P/B of 0.85x, benchmarked to AFC trough P/B. 
  • South Korean shipyard peers are trading at 2016F P/B of 0.55x. Share price has fallen 27% since the beginning of December from S$6.55 to S$4.80 as of 21 January close. 
  • Excluding Keppel’s O&M business, its non-O&M businesses are worth S$5.20/share. 
  • At current share price of S$4.80, investors would literally get the O&M business at zero cost. 


EARNINGS REVISION/RISK 


 Tweaking 2016 forecast up by 0.7%. 

  • We adjust our 2016 and 2017 forecasts by +0.7% and -5.8% respectively and introduce our 2018 forecasts. 
  • Our 2016 and 2017 forecasts of S$1.3b and S$1.2b factor in lower O&M earnings, offset by higher property earnings. 
  • We also de-recognise future revenue from Keppel’s Sete Brasil projects for all but two rigs (Urca, Frade), which are in advanced stages of completion and are most likely to progress forward if Sete Brasil’s issues are resolved under a revised contract size of six rigs. 
  • We initiate 2018 earnings at S$1.4b, pencilling in S$4.0b worth of contract wins for the O&M segment. 


VALUATION/RECOMMENDATION 


 Upgrade to BUY. 

  • We revise our target price to S$6.05, implying a 26% upside. 
  • With current share price implying zero value for Keppel’s O&M business, current valuations present a buying opportunity. 
  • We upgrade Keppel from HOLD to BUY. 


SHARE PRICE CATALYST 

  • Oil price recovery.




Nancy Wei UOB Kay Hian | Foo Zhiwei UOB Kay Hian | http://research.uobkayhian.com/ 2016-01-22
UOB Kay Hian Analyst Report BUY Upgrade HOLD 6.05 Down 6.30


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