RHB Research 2015-07-27: Keppel Corp - Property Pipeline Takes a Leap. Maintain BUY.

Property Pipeline Takes a Leap 

  • 1H15 PATMI of SGD757m was in line, at 49% of our FY15 forecast. 
  • Maintain BUY with a new SGD10.00 TP (23% upside, from SGD10.90), implying a 4.8% yield. 
  • Offshore & marine (O&M) core margins remained strong at c.13%, while the property segment outperformed with a jump in launch pipelines since 1Q15. 
  • Management highlighted the recurrence of revaluation (and other) gains/losses, which we interpret as strong hints of an intention to support the dividend. 

 Decent 2Q15 with a number of lumpy items. 

  • Slower recognition on Sete Brasil projects led to O&M revenue falling 18% QoQ, offset by a 68% revenue increase from the property segment as sales in Vietnam and China improved. 
  • PATMI in these segments were 15% lower and 62% higher respectively, as a result. 
  • The infrastructure arm saw lumpy gains, with a c.SGD280m gain from business combinations offset by c.SGD200m of cost overruns at the Doha North Sewage Treatment plant. 
  • Overall, 2Q15 core PATMI rose 2% QoQ. 

 Strong hints of dividend sustainability. 

  • Management highlighted in a new slide that revaluations, major impairments and divestments (RIDs) are recurring items, forming c.21% of annual PATMI for the last five years. 
  • It also stated that RIDs “are available to us in terms of funding dividend payouts.” 
  • We interpret this as a strong hint that the dividend is sustainable, given that the sale of the Keppel Merlimau Cogen plant has released c.SGD1bn of cash, and with Keppel Land having been privatised, we expect property revaluations to form a larger proportion of long-term earnings. 
  • Keppel announced a 12-cent dividend for the half-year, maintaining the same level as in 2Q14. 

 Potential positive surprises from property arm. 

  • Keppel’s 2Q15 slides reveal that 2,782/4,801/4,188 units are in the launch pipeline for Chinese homes for 2H15/FY16/FY17, a significant jump from 1,885/3,023/2,921 reported in 1Q15. 
  • The key reason was the inclusion of V City. 
  • Also, the launch pipeline for non-Chinese homes jumped to 2,191/2,432 units in FY16/FY17 from 1,643/2,012. 
  • Together, these indicate that property sales could surprise on the upside. 
  • While we have adjusted our recurring PATMI down 8%/5% for FY15F/FY16F assuming weaker O&M revenue, our reported PATMI forecasts have risen 7%/14% assuming larger RIDs from the property arm. 
  • Maintain BUY with a new SOP-based SGD10.00 TP. 
  • Key risks are lower O&M revenue and order flow. 

(Lee Yue Jer, CFA)

Source: http://www.rhbgroup.com/