Keppel Corporation - Hit by Impairment
- 4Q16 performance affected by impairment.
- Property segment remains the silver lining.
- Declared 12-Sct final dividend.
- Maintain HOLD; TP S$6.00.
Reiterate HOLD with TP of S$6.00.
- The acceleration of oil rebalancing following OPEC’s production cut should drive the recovery in rig demand and delivery of newbuild rigs on order.
- Property, which accounts for 50-70% of the group’s bottom line, should continue to enjoy promising property sales in China and Vietnam, providing some cushion to the moderated O&M income and support our estimate of DPS of 20-24 Scts (3-4% dividend yield) for FY17-18F based on 40% payout ratio.
- Our TP is lifted to S$6.00 as we roll over valuation to FY17 and imputed valuation for Keppel Capital.
Impairment on O&M assets.
- In 4Q16, Keppel provided S$313m impairment for fixed assets, stocks & WIP and investments which largely arose from the O&M segment, partially offset by fair value gain on investment property. Stripping this out, PATMI would have been better than expected at c.S$300m (vs reported S$143m).
- O&M segment reported a loss of S$138m due to provisions of S$270m in the quarter. Otherwise, it would have registered a stellar EBIT margin of 18.8% and PATMI of S$130m, aided by write-back, repair jobs and cost savings. Order wins in 2016 was rather low at S$500m. We expect Keppel to secure S$1.5bn worth of new orders this year.
- Orderbook (excluding S$4bn Sete rigs) has dwindled to S$3.7bn, from S$5.1bn as at end-2015 and S$4.1bn a quarter ago.
Property business remains the silver lining.
- Management remains optimistic of stronger home sales in China and Vietnam with 19k launch-ready homes in its pipeline through 2019, representing 3.3x of home sales in 2016.
- The consolidation of Keppel’s asset management businesses under Keppel Capital that were completed in July 2016 strengthen its capital recycling platform and provide a steady stream of recurring income for the group.
- Our TP of S$6.00 is based on sum-of-parts :
- O&M segment is valued at 2x P/BV,
- infrastructure at 10x PE on FY16F earnings,
- property segment at 0.85x P/BV,
- Investment (Keppel Capital) at 15x PATMI, and
- market values/estimated fair values are used for listed subsidiaries.
- Our TP translates to 0.9x FY17 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$3-4bn levels in each of FY17 and FY18, 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.