Keppel Corporation - CIMB Research 2015-12-09: Asset recycling to ease O&M burden

Keppel Corporation - CIMB Research 2015-12-09: Asset recycling to ease O&M burden KEPPEL CORPORATION LIMITED BN4.SI 

Keppel Corporation - Asset recycling to ease O&M burden 

  • Deceleration of order book may be prolonged if cycle does not turn around in 2018. Earnings downside remains if Brazilian woes worsen. 
  • We maintain our Hold call, as we believe there could be value proposition from divestment of non-core assets that would lead to dividend upside. 

■ Order book could shrink 30% p.a. 

  • KEP's order book stood at S$10bn as at end-9M15, with order wins of S$1.7bn YTD. 
  • A prolonged dreariness in the offshore capex cycle beyond 2016 could erode KEP’s order book by c.30% p.a. to S$4bn by end-2017. 
  • Accordingly, O&M earnings will see a significant plunge in FY17, shrinking by 20% from FY15. 

■ Brazilian contracts – too big to fail 

  • Including the two FPSO topside integration contracts for Petrobras, KEP’s exposure in Brazil amounted to c.S$7bn or 70% of its order book. 
  • Outright cancellation may not be realistic given the heavy investments that it had already sunk in. Various stakeholders and creditors have too much to lose, including national banks and pension funds. 
  • However, we believe that the contract settlement of the six semi-subs for Sete Brasil will not come soon, as the timeline has been a moving target. 

■ Rising net gearing 

  • Its net gearing rose from 0.11x at end-2014 to 0.52x at end-Sep 15, mainly to fund O&M’s working capital and this trend is likely to be worsened by the drag from Sete Brasil. 
  • We believe KEP is likely to unlock non-core assets in the near term to ease any balance sheet stress. 

■ Asset recycling 

  • In the long term, KEP is considering partnering with private funds to grow its infrastructure assets to achieve better returns. 
  • In addition, there will continue to be periodic monetisation of assets across segments by injection into a REIT or trust structure to attract higher valuations. 
  • We believe that he property assets in Alpha Investments could be the candidates that have been earmarked. 

■ Maintain Hold 

  • Our RNAV-based target price of S$7.12 is intact
  • KEP's share price is likely to be capped by uncertainty from Sete Brasil contracts and the ongoing corruption probe by Petrobras. However, upside surprise could come from major divestment of non-core assets. 
  • Its valuation is not expensive at c.9x CY17 P/E, 1 s.d. below its 10-year trading band. 
  • We would re-evaluate our recommendation if it can clinch higher order wins and the settlement of Brazilian contracts.

LIM Siew Khee CIMB Securities | 2015-10-23
CIMB Securities SGX Stock Analyst Report HOLD Downgrade ADD 7.12 Down 7.46