Maybank Kim Eng Research 2015-07-24: Keppel Corp - Weaker Than It Looks. Maintain HOLD.

Weaker than it looks 

  • 2Q15 below expectations, boosted by SGD202m divestment gain. Additional SGD200m loss provision for Doha project. Interim dividend of 12.0 SGD cts/sh. 
  • O&M margin inched up but profit dipped on weaker revenue. Strong property sales in China were the only bright spot. 
  • Cut FY15-17 EPS by 4-9%. Maintain HOLD with SOTP TP cut from SGD8.50 to SGD7.80. 

2Q15 O&M net profit down 36% YoY & 15% QoQ 

  • We deem 2Q15 PATMI of SGD396.7m (-2.3% YoY, +10.1% QoQ) as a miss. 
  • While 1H15 PATMI of SGD756.9m formed 49%/47% of our/consensus’ FY15E, this was boosted by SGD202m gain from divestment of Keppel Merlimau Cogen. 
  • Keppel also took additional losses (~SGD200m) on its Doha sewage treatment EPC project but said that this will be the final provision. 
  • 2Q15 O&M operating margin inched up to 13.0% QoQ (1Q15:12.0%, 2Q14:14.7%), but net profit dipped 15% on weaker revenue. 
  • Property sales in China were the only bright spot with 1,170 homes sold in 1H15 vs 1,060 in 1H14. 
  • Interim DPS of 12 SGD cts/sh is equivalent to last year’s. 

What’s Our View 

  • Keppel has slipped into a marginal negative cashflow position for the Sete Brasil 6-rig project. It will slow down construction while Sete Brasil resolves its financing issues, but is confident of the continuation of the project. 
  • O&M’s YTD order win amounted to SGD1.5b and net orderbook stood at SGD11.0b as at 2Q15, down from SGD11.3b a quarter ago. 
  • It expects FLNG and production-related orders to cushion the slowdown in rig orders. But we further cut FY15/16E order win assumption from SGD2.9b/3.8b to SGD2.6b/2.8b. 
  • We cut FY15-17 EPS by 4-9% for O&M delivery adjustments, lower margins and weaker O&M order intake. 
  • SOTP TP drops from SGD8.50 to SGD7.80. 
  • Maintain HOLD for lack of near term catalysts but supported by 5.4% dividend yield and market’s preference for its diversified exposure over SMM in the O&M sector downturn. 

(Yeak Chee Keong, CFA)