Keppel Corporation - DBS Research 2016-10-21: Rightsizing Offshore & Marine

Keppel Corporation - DBS Research 2016-10-21: Rightsizing Offshore & Marine KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Rightsizing Offshore & Marine

  • 3Q16 results below as O&M slid further.
  • Cut FY16-17F earnings by 8-11%.
  • Rightsizing O&M division.
  • HOLD for oil recovery and decent dividend yield.


Reiterate HOLD with TP of S$5.25. 

  • We believe OPEC’s recent change in production stance could accelerate oil rebalancing and drive a recovery in rig market which remains a key re-rating catalyst. 
  • Property has taken over from O&M as Keppel Corp (Keppel)’s largest earnings contributor, accounting for 50-70% of the group’s bottomline since 4Q15. The promising property sales in China and Vietnam will provide some cushion to the plummeting O&M income and support our estimate of DPS of 19-21Scts (3-4% dividend yield) for FY16-17F based on 40% payout ratio.


O&M division is barely profitable

  • O&M division is barely profitable, churning only S$11m net earnings in 3Q16, which is 95% off its recent peak of S$287m in 4Q14 and 83% lower q-o-q. This led to group earnings falling by 43% y-o-y to S$641m in 9M16, making up only 67%/62% of our and consensus’ estimates. 
  • We have cut FY16-17F earnings by 11-19% after pushing back deliveries, and lowering order win assumptions. 
  • Year-to-date (YTD) order wins is lagging behind at S$500m. 
  • We now expect Keppel to secure only S$1.0bn worth of new orders this year (from S$1.5bn previously), lower than S$1.8bn last year. Orderbook (excluding Sete rigs) has dwindled to S$4.1bn, from S$5.1bn as at end- 2015 and S$4.3bn a quarter ago.


Property business a silver lining. 

  • Management remains optimistic of stronger home sales in China and Vietnam with 16.3k launch-ready homes in its pipeline through 2018, representing 3.6x of home sales in 2015. 
  • The consolidation of Keppel’s asset management businesses under Keppel Capital was completed in July, strengthening its capital recycling platform and providing a steady stream of recurring income for the group. 
  • Management denied intention to list Keppel Capital in the near term.


Valuation

  • Our TP of S$5.25 is based on sum-of-parts : 
    1. O&M segment is valued at 2x P/BV, 
    2. infrastructure at 10x PE on FY16F earnings, 
    3. property segment at 0.85x P/BV, and 
    4. market values/estimated fair values are used for listed subsidiaries. 
  • Our TP translates to 0.8x FY16 P/BV.


Key Risks to Our View

  • O&M segment could fare worse than expected. We forecast revenues from Keppel O&M falling to the ~S$3bn levels in each of FY16 and FY17, from S$7-8bn p.a. during FY12-14.
  • The continued depletion of its orderbook, and deferments/cancellations could pose downside risks to our forecast.




Janice CHUA DBS Vickers | Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2016-10-21
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 5.25 Down 5.250



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