Keppel Corporation - Looking at the gas market
- O&M broke even in 1Q.
- Focus is on new order flow.
- LNG orders?
Question is when 1Q17 boosted by disposal gains.
- Keppel Corporation (KEP) reported a 28.4% YoY fall in revenue to S$1.25b and a 23.7% rise in net profit to S$260.4m in 1Q17, such that the latter accounted for 29% of our full year estimate.
- However, this was bumped up by one-off items such as S$46m of writeback of impairment of investments, S$32m gain on disposal from the sale of 80% interest in PT Sentral Tunjungan Perkasa, as well as S$44m gain from the sale of interest in GE Keppel Energy Services Pte Ltd and Cityone Development (Wuxi) Co.
- We estimate recurring net profit of about S$113m, dragged by the offshore marine segment which broke even in 1Q17.
- The property division, which has lumpy quarterly contributions, saw a 48% YoY fall in revenue to S$262m with lower revenue from China and Singapore.
Sees opportunities in LNG space; question is when
- Looking ahead, management shared that it sees many opportunities in the gas market, especially where Keppel-built carriers and regasification units can be deployed alongside small gas-fired power units.
- Keppel is also re-purposing its offshore technology for applications in other areas including floating infrastructure assets.
Everyone knows that O&M suffering; what’s new?
- Meanwhile, it is already a well-known fact that the O&M division is undergoing a rough patch, hence negative news related to earnings or impairments may just be taken in stride by the market. What is of focus will be the flow of new orders.
- We are valuing the O&M segment based on 1x P/B, given that we do not expect a quick recovery in new order flows.
- Expectations are low, and while there is unlikely to be any demand for newbuild rigs, there remains the possibility of production-related orders, as well as FLNG orders.
- On a group-wide basis, KEP is also trading at 1.0x book, below its trough of 1.2x during the 2008 financial crisis.
- Our revised fair value estimate of S$7.36 (down slightly from S$7.40 after updating the values of KEP’s listed entities) implies a P/B of ~1.1x.
- Maintain BUY, given the upside potential of ~15%.