Keppel Corp (KEP SP) - UOB Kay Hian 2016-10-21: 3Q16 Putting Up A Stoic Front

Keppel Corp (KEP SP) - UOB Kay Hian 2016-10-21: 3Q16 Putting Up A Stoic Front KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corp (KEP SP) - 3Q16 Putting Up A Stoic Front

  • Keppel posted its third consecutive quarter of an earnings miss with core net earnings of S$184m in 3Q16. O&M margin weakened to 11% and earnings are expected to remain weak. 
  • Keppel’s large exposure to the Chinese property market is a negative, given the recent introduction of cooling measures. Its reduction of unit launches by 10-30% in various parts of China is indicative of this. 
  • Slash earnings forecast by another 12-27% on lower earnings from property and our reduced O&M contract win assumption. 
  • Maintain HOLD with a lower target price of S$5.04.


RESULTS


3Q16 net profit below expectations yet again. 

  • Keppel Corp (Keppel) reported a 3Q16 net profit of S$225m (-38% yoy), and S$641m for 9M16 (-43%). Numerous exceptionals were recorded this quarter, notably from its subsidiary Keppel T&T (KPTT), as well as from Keppel O&M. 
  • Excluding the one-offs, core net profit was S$184m (-52%) for 3Q16 and S$578m (-31%) for 9M16. 
  • 9M16 results represent 59% of our full-year core earnings forecast and 3Q16 is the third consecutive quarter in which Keppel has missed consensus earnings forecast. The earnings miss was due to a sharp drop in earnings from the O&M unit, as well as some softness in its property unit.

Net exceptional items of S$31.8m. 

  • Three exceptional items stood out this quarter: 
    1. a S$27.0m gain from adjustment to gain on disposal of data centres; 
    2. a S$27.0m impairment loss for its China logistic business at KPTT, and 
    3. a balance of S$7.5m of impairment of fixed assets in the offshore and marine division. 
  • Other one-off items include fair value gains on derivatives, forex gains and gains on the disposal of subsidiaries/fixed assets.

O&M margins down to 11% for 3Q16. 

  • Keppel made a S$7.5m impairment in its O&M unit in 3Q16. While 9M16 operating margin appeared flat at 12%, for 3Q16 it fell to 11% after adjusting for the impairment. 
  • Adjusted net profit for the quarter was S$18m, down 89% despite delivery of about nine projects in 3Q16. We suspect the lower margin might relate to its FPSO projects. 
  • While no deferrals were announced this quarter, we note that Crystal Heights’ liftboat has had its delivery delayed from end-17 to 2018, and that a FPSO modification & upgrade project was shifted from 2018 to 2019-21.

Property operating margin down 13ppt. 

  • The property unit registered higher sales of 1,370 units in 3Q16. While revenue was up in tandem with the higher sales figures, operating margin showed a 13.1ppt decline to 18.8%. 

Net gearing down slightly to 59%. 

  • Net gearing fell slightly from 62% in 2Q16 to 59% this quarter. The improvement was due to a net repayment of S$345m in debt, and positive working capital change of S$465m. 
  • Working capital improvement this quarter was helped significantly by delaying payment to creditors, with days payable outstanding rising from 203 days to 329 days.


STOCK IMPACT


O&M facing a contracting drought. 

  • Keppel’s net orderbook stood at S$4.1b as of endSep 16. Ytd contract wins have been meagre at about S$500m. The contracting drought is looking worse than we had expected. Production related orders continue to be talked about, but they remain elusive. 
  • We think contract awards might fall short of our S$1.8b forecast, even with a handful of production orders due for tender/award in end-16.

Higher oil prices might boost sentiment, but yards remain the last to benefit in a cycle. 

  • While higher oil prices have helped share prices in the recent weeks, we reiterate the fact that shipyards are the last beneficiary in an oil boom cycle. The oversupply in the rig sector will not clear until 2020 at the earliest, and the O&M business will suffer low contract wins in between.

Property business showing signs of weakness. 

  • While Keppel views its property business positively, we see headwinds in its China projects given the new round of cooling measures announced by the Chinese government. Some of this can be seen from Keppel’s Residential Launch Readiness table, where the number of units to be launched in 2017 for various Chinese cities was reduced by 10-30%. 
  • Vietnam also saw a reduction of 20%. Notably, its Indonesia project was pushed from 2017 to 2H19. We infer from these that headwinds might be seen in what was supposed to be an area of growth for Keppel.

Good business management, but headwinds might be too much to surmount. 

  • To be fair, Keppel has managed its business and balance sheet very well despite the headwinds facing its business. While we believe it will continue to maintain a strong balance sheet position, it might not be able to stem the decline despite its numerous earnings streams.


EARNINGS REVISION/RISK


Cut contract win assumptions further to S$1.0b/1.5b/2.0b over 2016-18 respectively. 

  • Given the likely tender awards in end-16, the full-year might surpass our forecast. Any contract win however, will likely contribute in 2017 and beyond.

Earnings forecasts reduced further by 12-27%. 

  • We reduce our core earnings forecasts for 2016-18 to S$800m (-12%), S$768m (-16%) and S$709m (-27%) respectively. This is premised on lower contract win assumptions and reduced revenue from the property business.


VALUATION/RECOMMENDATION


Maintain HOLD; lower target price to S$5.04. 

  • Over two-thirds of Keppel’s valuation comprises its ownership of Keppel Land. Given the large exposure to the Chinese property market, a discount to RNAV of at least 50% should be accorded, in line with Chinese developers. 
  • Taking into account that local developers are trading at 30-50% discount to RNAV, we apply a 40% discount instead. We peg the O&M unit to 0.55x 1-yr forward P/B, a 10% premium over its debt-laden South Korean peers. 
  • Its other business units are pegged to market value. 
  • All in all, our target price falls to S$5.04. Maintain HOLD, entry price at S$4.85.


SHARE PRICE CATALYST

  • Higher oil prices.
  • Relaxation of property curbs in its business jurisdictions.




Foo Zhi Wei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-21
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 5.04 Down 5.700



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