Keppel Corporation - 1Q17 Divestment mode
- 1Q17 reported net profit of S$260m (+24% yoy, +82% qoq) in line with our forecast but 17% above Bloomberg consensus, helped by divestment gains and write-back.
- O&M was barely profitable in 1Q17 at S$0.1m due to low volume of work. Gross margin was unable to cover fixed costs.
- Property had more recycling of assets in Indonesia and China, which boosted the group’s divestment gains. Home sale was lacklustre in Vietnam and China.
- Maintain Hold and SOP-based target price of S$7.24. Share price could be under pressure near term on the back weak 1Q17 showing.
Lifted by divestments
- 1Q17 earnings were helped by divestment gains of S$76m -- S$32m from disposal of 80% of PT Sentral Tunjungan Perkasa Surabaya; S$43.5m from disposal of interest in associated companies Infrastructure GE Keppel Energy and Cityone Development in Wuxi.
- There was also a S$46m of write-back of investments (lagged equity accounting for KrisEnergy’s earnings). Excluding these gains, the results would be a miss.
O&M revenue nearly halved; Borr Drilling could help from 3Q17
- Low volume of work caused a 40% qoq and yoy drop in O&M revenue. The division posted S$0.1m net profit. The EBIT margin of 0.8% was a far cry from FY16's average of 14%. We believe the novation of five Super B-jack-up rigs from Transocean to Borr Drilling will help to lift revenue recognition more meaningfully from 3Q17 as the contract is only effective from May 2017.
- To recap, the first three rigs (to be delivered in 2017-18) are c. 75% completed while the remaining two (2020 delivery) are < 20% completed.
O&M hungry for work
- Current order book stands at S3.5bn with no new orders secured YTD. We keep our 2017 order forecast of S$2bn, anticipating specialised LNG and non-drilling equipment jobs to trickle in.
- Keppel cut c.1,250 of its O&M global direct workforce in 1Q17, bringing total cuts since 2015 to 18,000 (49% from peak). With this, O&M staff force has reached a steady state. The mothballing of its Singapore yards is ongoing - one completed; two more to go.
- Management clarified that no more impairment is required for the closures.
Weaker sales in Vietnam and China, hope to catch up
- 1Q17 property net profit was S$103m (+4% yoy, -62% qoq). Home sales plunged 55% qoq to 980 units.
- Vietnam saw the biggest drop (90% qoq) to 120 units.
- China slowed 15% qoq to 730 units with fewer new homes launched in 1Q17.
- Singapore, however, improved 63% qoq to 130 units. The recent slight relaxation of seller’s stamp duties and minor change in TDSR could have helped.
- A pick-up in subsequent quarters is possible as 5,930 overseas homes will be launched in 2017 (China: 2,633, Vietnam: 1,785).
Investment star performer
- Investment jumped from an average net profit per quarter of S$9m in FY16 to S$125m in 1Q17 on the back of
- higher sale of investment,
- S$46m write-back of impairment in KrisEnergy,
- fair-value gain of KrisEnergy warrants, and
- sale of three parcels of land in 50/50 JV in Tianjin Eco City at c.Rmb 5bn (average price of Rmb14,000 psm of GFA).
- Asset management income remained steady at S$13m in 1Q17.
Maintain Hold and SOP-based target price of S$7.24
- Net debt remained steady at 0.57x in 1Q17. O&M working capital should improve with more deliveries and lower fixed costs in FY17F. However, we cut our FY17-19F EPS by 1-3% to reflect weaker O&M revenue and margin.
- Potential re-rating catalysts are more O&M orders or sizeable assets divestments.
- Downside risks are slower orders.