Keppel Corp (KEP SP) - Maybank Kim Eng 2016-12-09: Setting up for disappointments

Keppel Corp (KEP SP) - Maybank Kim Eng 2016-12-09: Setting up for disappointments KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corp (KEP SP) - Setting up for disappointments


Market still treats Keppel as an oil-related play 

  • We see the recent sentiment-driven rally as unsustainable. Despite shipyards being late cyclical beneficiaries and Keppel’s skew to property earnings, it was among the top gainers post OPEC production cut and even ahead of pure-play rig-builder SMM (SELL, TP SGD1.00)
  • The stock price reaction even though O&M accounted for only 26% of its 9M16 net profits shows that the market still treats Keppel as an oil-related play. If this was the case for the rally, we believe that the stock is set up for disappointments come 1Q17 where we expect: 
    1. O&M provisions, 
    2. EPS downgrades and 
    3. dividend miss. 
  • Reiterate SELL and SOTP-TP of SGD4.57.


Expect more provisions 

  • We think that Keppel faces a higher risk for asset write-downs than SMM given that it has only provided SGD230m vs our initial estimate of up to SGD1b and SMM’s SGD609m in 4Q15. Even though oil prices are now higher than a year ago, offshore rig utilisation is at c.50% level vs c.70% a year ago, suggesting that supply-demand dynamics for rigs have deteriorated and the likelihood for clients to take delivery of rigs should be weaker. 
  • We believe that additional provision could surface in its FY16 results.


Weak contract coverage, EPS downgrades likely 

  • We forecast that Keppel O&M’s revenue could fall from SGD6.2-8.6b in FY13-15 to SGD2.6-3.1b over FY16-18E. We estimated that c.3b of its SGD4.1b of O&M orderbook had delivery dates deferred. 
  • With weak order replenishments of only SGD0.5b YTD, we see downside risk to revenue if order intake continues to miss our FY16E/17E assumption of SGD0.8b/1.6b. 
  • We estimate that if O&M revenue falls to about SGD1.6- 1.8b levels, the O&M segment may sink into operating losses.


Potential dividend disappointment 

  • The third disappointment could come from lower-than-expected dividends given lower earnings and cashflow needs. 
  • Our FY16E dividend forecast of SGD0.18/sh is below consensus’ SGD0.23/sh as we believe that Keppel needs to conserve cash for the long winter. 
  • On our forecasts, this implies a 3% yield which is unattractive relative to history of c.5-6%.


Swing Factors


Upside

  • Sete Brasil settles its financing woes, is able honour all its contracts and pays Keppel its dues.
  • Ability to turn contract cancellations around by re-selling and making better profits because of forfeiture of original client’s deposit.
  • Asset divestments that results in significant gains and value unlocking, which is possible in Keppel T&T and infrastructure segments.

Downside

  • Sete Brasil files for bankruptcy, dishonouring all its six semisub contracts with Keppel O&M.
  • Contract cancellations by other drilling rig owners, resulting in asset write-downs and losses.
  • Property segment fails to compensate for drop in O&M segment profits.




Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-12-09
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 4.57 Up 4.540




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