Keppel Corporation - Scrubbing mode
- FY16 net profit of S$784m was below expectations, forming 74% of our forecast and 85% of consensus.
- O&M took in S$277m of impairment in 4Q16 for Can Do drillships, mothballing of supporting yards in Bintan and Brazil as well as write-down of investments.
- Final DPS of S$0.12 was declared, bringing FY16 DPS to S$0.20, a 46% payout (FY15:40%). Management guided for 40-50% payout in FY17.
- Maintain Reduce with a slightly higher RNAV-target price, incorporating revised target price for KeppelT&T and market value of Kris Energy.
S$277m impairment in O&M
- O&M reported a loss of S$139m in 4Q16 with S$277m of impairment and provisions for stocks. The impairments came from
- c.S$87m fixed assets written off to mothball two supporting yards – Bintan and Santa Catarina, Brazil,
- c.S$81m for stocks and work in progress for CanDo drillship and
- c.S$109m for investments in associates.
- There could be more impairment ahead as the group is still rightsizing its yards in Singapore.
- KEP has not taken in any provisions for undelivered and deferred jack-up rigs.
O&M orders will not recover quickly
- Excluding the impairment, EBIT margins for O&M stood at 18.8%. This included some write-back of costs for delivered projects as well as higher repair jobs.
- FY16 EBIT margin averaged at 14%, which we deem decent.
- KEP secured c.S$500m of orders in FY16 and we are expecting S$1.2bn for FY17. Management does not expect orders to recover quickly although oil majors are expected to increase spending on the back of higher oil prices.
- Order book stands at S$3.7bn.
Property boosted by sales in Vietnam
- Property registered 4Q16 net profit of S$269m (+71% qoq, -27%yoy). This included S$64m of revaluation gains from investment properties (reval. gain in FY15: S$129m).
- Sales in Vietnam picked up significantly in 4Q16 with c.1,200 houses sold. KEP expects to recognise the profit from 4,200 houses sold overseas before 2016 in the next three years. There are 19,000 launch-ready houses for 2017-19.
Investment could swing the earnings
- Investment division incurred a loss of S$6m in 4Q16, which included losses made in equities and impairment in KrisEnergy. However, we estimate that it had made c.S$60m profit from land sales in the 50-50 JV in Tianjin Eco City.
- In Jan-17, the JV sold three land parcels for c.Rmb5bn with an average price of Rmb14,000/sqm of GFA, higher than the last sale price of Rmb8,000/sqm.
- More land sales ahead could swing earnings.
- Infrastructure net profit of S$19m in 4Q16 (-51% qoq, -61% yoy) was below our expectation, mainly due to revaluation losses from Keppel DC Reit. Excluding this, recurring EBIT from operational & maintenance was steady qoq at S$26m.
Maintain Reduce; target price inches up to S$5.21
- We believe the share price outperformance YTD is mainly on the back of the STI-index rally and hopes of oil price recovery. At this price, market is pricing in O&M at c.3x P/BV, which mimics a super cycle.
- Our -30% discounted RNAV valuation of its property division is also in line with Singapore property developers’ current trading band.
- The group’s net gearing of 0.56x may cap large new property investments by KEP alone. More asset-recycling or JVs are needed.
- Key risk to our view is a surge in orders.