CIMB Research 2015-07-24: Keppel Corp - Strategically prepared. Retain ADD.

Strategically prepared 

  • Major corporate actions including the privatisation of Kepland, divestment of a 51% stake in Keppel Cogen and restructuring of KIT with CitySpring cushioned the 2Q15 weakness. 
  • 2Q15 core net profit (S$123m) was below, at 8% of our FY15 forecast, mainly due to lower Offshore & Marine revenue and a provision of c.S$200m for Infrastructure’s Doha project. 
  • Property was the only growth driver thanks to stronger home sales in China. 
  • 2Q15 reported profit of S$397m included S$274m in disposal and restructuring gains. 
  • We cut our FY15-17 EPS by 5-17% to account for lower Infra profits and delays in O&M revenue recognition. 
  • We retain Add with a lower RNAV-based target price of S$8.88. An interim S$0.12 DPS was declared. 
  • We believe clarity on Sete Brasil financing plans by 2H15 could catalyse the stock. 

Infrastructure made a final provision of c.S$200m 

  • Infrastructure reported a core loss of c.S$170m in 2Q15 due to a provision of c.S$200m made for the delays and cost overruns in the Doha North Sewage Treatment project (expects to complete by end-15). 
  • Management reiterated that the provision made represents the final round of adjustments. 
  • Going forward, we expect c.S$15m-S$20m of profit/quarter, but downside could come from margin pressure in the oversupplied power market in Singapore. 

Expect stronger 2H for O&M 

  • O&M revenue fell 18% qoq to S$1.58bn in 2Q15 as Keppel scaled down significantly on Sete Brasil, pending payment. 
  • No major rigs were completed in 2Q15 and some customers requested for delays in delivery, pushing back revenue recognition. However, EBIT margin improved to 13% (1Q15: 12%) from VOs and cost savings from the overall equipment and materials costs. 
  • O&M secured S$1.5bn worth of orders or 75% of our S$2bn full-year target. 
  • Order book stood at S$11bn (1Q15: S$11.3bn). 
  • With 10 jack-up rigs slated for delivery in 2H15, we expect O&M to turn in higher revenue and profits. 
  • Negotiations are still ongoing with Sete Brasil regarding payments, delivery and potential financing of the last two semi-subs. 

Property to the rescue 

  • Property’s net profit rose 63% qoq to S$117m, with stronger home sales (c.800 units) in China offsetting a weak Singapore market. 
  • The China home sales momentum could continue with four new projects due for completion in 3Q15.

(LIM Siew Khee)