Keppel Corporation - DBS Research 2015-10-23: Benefits of diversification

KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Benefits of diversification

3Q15 in line; weaker O&M earnings mitigated by stellar property performance
Another three jackup rigs are deferred by 3-4 months with compensation from customers.
HOLD for decent dividend yield; TP adjusted to S$7.40.

Keppel reported net earnings of S$363m in 3Q15, bringing 9M15 bottomline to S$1.1bn, which made up c.76% of our full-year estimates.
O&M PATMI dropped 34% y-o-y and 4% q-o-q to S$166m due to a decline in revenue from project deferments and margin contraction of 2.7ppts to 12%.
Infrastructure segment was also weaker, with net contribution falling 11% to S$34m given the lower contribution from Merlimau Cogen plant after injecting a 51% stake to KIT, and disposal of Keppel FMC.
Property segment was the silver lining, registering earnings growth of 57% y-o-y and 24% q-oq to S$144m, led by promising overseas property sales predominantly in China and Vietnam and an increase in its stake in Keppel Land.

Management is cautious as the operating environment remains challenging in view of the macro headwinds and low oil prices;
Order book dwindled from S$11bn as of end-Jun to S$10bn as YTD wins have been slow at S$1.7bn;
Keppel accepted requests from Grupo R and Parden to defer delivery of three jackup rigs by 3-4 months with some compensation;
Negotiations with Sete Brasil are still ongoing. Construction progress has slowed down pending Sete Brasil’s restructuring;
FLNG remains a bright spot for Keppel. Notice to commence work for the second unit is expected by the end of the year while FEED study for the third unit is advancing. Golar has also initiated talks with Keppel for a potential new contract for a fourth FLNG vessel.

We have trimmed our FY16F earnings by 11% after cutting 2015 order wins by S$500m to S$2bn and pushed back the commencement of the remaining three Petrobras rigs by another 6 months.
While we remain cautious on the rigbuilding outlook in anticipation of sluggish order flow and prevailing deferment and cancellation risks, Keppel’s valuation is inexpensive, with the stock trading near its GFC low of 1.1x P/Bv and offering decent dividend yield of 5%.
Maintain HOLD. Upside surprise could come from gains from disposals.

Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2015-10-23

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 7.40 Down 7.50