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Keppel Corp - Maybank Kim Eng 2016-04-19: Poor Showing Adds to Worries

Keppel Corp - Maybank Kim Eng 2016-04-19: Poor Showing Adds to Worries KEPPEL CORPORATION LIMITED BN4.SI 

Keppel Corp (KEP SP) Poor Showing Adds to Worries 


Poor 1Q16; Further Cut to EPS; Reiterate SELL 

  • 1Q16 PATMI of SGD211m (-42% YoY, -48% QoQ) missed our below-market forecast, equal to 19% of our and only 17% of consensus’ FY16E. 
  • A 37% YoY rise in property earnings was insufficient to offset declines in its other three divisions. 
  • In our last report (Unsustainable Rally-30 Mar 16), we highlighted that consensus needs to cut EPS further to adjust for O&M contract deferments. 
  • We trim FY16-18E EPS by another 1-5%, but expect deeper consensus cuts. 
  • Maintain SELL and SOTP-TP of SGD4.42 as we believe that the recent sentiment driven rally is unsustainable without EPS growth visibility. 


O&M writedowns & cancellations not all priced in 

  • 1Q16 O&M revenue dipped 58% YoY and 38% QoQ as contracts got deferred, while Sete Brasil recognition was suspended. 
  • Keppel also revealed that two more jackups(Clearwater & BOT Lease) and two unnamed semisubs have been deferred. 
  • We estimate that O&M’s FY16- 18E revenue will contract to c.SGD4.0-4.5b vs. the SGD6.2-8.6b over the last three years. 
  • Net orderbook at 1Q16 was SGD8.6b, but that includes c.SGD4b of Sete Brasil orders and c.SGD1b of Transocean orders that were deferred to 2020. Order replenishment has been weak, with only a SGD190m win YTD, 12% of our SGD1.6b forecast for FY16. 
  • We think that the market has yet to price in further asset write-downs if current deferments turn into cancellations. 


Property insufficient to make up for weak 

  • O&M China property sales were strong, accounting for most of the 940 homes sold in 1Q16 (1Q15: 720 homes). But this was insufficient to support the weakness in all three other divisions this quarter. 
  • Housing prices have soared in many Tier-1 Chinese cities and we cannot rule out upside surprises in subsequent quarters. Nevertheless, the government has stepped in with policy tightening in overheated Shanghai and Shenzhen. 


Downside risks aplenty 

  • Catalysts that support our Sell call could come from: 
    1. more O&M contract deferments; 
    2. contract cancellations; 
    3. more provisions; and 
    4. negative developments in Brazil. 
  • Upside risk would be a sharp and sustainable rebound in oil price, inducing drillers to order new rigs.





Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-04-19
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 4.42 Same 4.42


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