Keppel Corporation - CIMB Research 2016-04-19: Entering a long drought

KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Entering a long drought

1Q16 net profit of S$211m (-48% qoq, -41% yoy) missed our estimates by 40% and consensus by 31%. Property alone cannot sustain the fort.
Key culprits include
1. drastic drop in O&M revenue due to deferrals,
2. lower power sale in infrastructure, and
3. share of losses from KrisEnergy.

FY16-18F EPS cut by 11-20%. This reduces our RNAV-based target to S$5.14.
Downgrade from Hold to Reduce. De-rating catalysts include impairment of deferred projects and dividend cut.

1Q16 offshore and marine (O&M) core profit plunged 58% yoy and 44% qoq to S$95m, missing our forecast by 38%.
Deferral of rigs from 2016 to 2017/18 – including Ensco 123 (Super A), Clearwater JU, BOT Japan Drilling JU and two unnamed semisubmersibles – was the key culprit for the lower revenue recognised (-58% yoy and - 38% qoq).
1Q16 operating profit margin of 13.6% was above our expectation of 13%.

New deferrals surface almost every quarter and we believe the headwinds faced in the offshore rig market, pressured by oil prices and ample supply, may lead to more deferrals in 2H16.
KEP O&M is slated to deliver six JUs in 2016- three to Grupo R, one JU each to Parden Holdings, Perforadora Central and Falcon Energy, and one semi-sub to SOCAR. The JUs are not backed by contract and have been under negotiation for deferral since 2015.
We see risks of impairment for these contracts.

Property overtook O&M at 47% of group profit (O&M: 45%).
1Q16 property net profit of S$99m (+37% yoy) is in line with our expectations.
940 homes were sold (+31% yoy), comprising 830 homes in China, 50 in Vietnam and 60 in Singapore. 8 park Avenue in Shanghai was the key earnings driver with c.S$64m profits recognised.
Capital recycling/ asset monetisation are crucial, in our view, to speed up growth in property as the group’s net gearing is weighted down by O&M (0.56x in 1Q16 vs. 0.53x in 4Q15).

1Q16 infrastructure net profit of S$14m (-39% yoy, -71% qoq) was below our expectation due to weaker power and gas sale in Singapore.
Infrastructure recorded S$2.6m share of associate loss, mainly to reflect weakness in Keppel Cogen Merlimau (49% stake).
Investment suffered a lagged S$40m equity loss from KrisEnergy.

O&M has secured S$0.2bn of orders YTD; hence we keep our S$1bn order target for 2016 intact. However, we cut our FY16-18 EPS by 11-20% as we lower our O&M revenue and profit assumptions for infrastructure and investment.
Our target price, still based on RNAV is cut (from S$5.53 to S$5.14) to reflect weaker O&M.
The uncertainty in Brazilian’s political scene and oil prices may hamper further negotiation of Sete Brasil’s projects progress and dims hope of a write-back.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-04-19

CIMB Securities SGX Stock Analyst Report REDUCE Downgrade HOLD 5.14 Down 5.53