Keppel Corp - Maybank Kim Eng 2016-01-19: De-rating Catalysts Simply Too Strong

KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corp (KEP SP) De-rating Catalysts Simply Too Strong

We expect de-rating catalysts for O&M to drag down KepCorp in the next six months, triggered by:
1. muted order wins;
2. potential contract cancellations; and
3. asset writedowns.
We cut FY16-17 EPS by 15-23% as we remove high-risk contracts from our recognition schedule.
We also price in property stock corrections since mid-2015.

In view of its need to conserve cash to tide it over, we expect FY15 DPS to be lower.
We also cut FY16-17 payouts to c.30%. Watch for asset divestments to beef up balance sheet.
With no more yield support, downgrade from HOLD to SELL.
SOTP TP cut from SGD7.70 to SGD4.24.

We cut Keppel O&M’s FY16/17 order wins from SGD2.8b/3.9b to SGD1.6b/year. In our view, there is no need for new rigs even if oil rebounds to USD50-60/bbl due to rig oversupply.
Keppel did not secure any drilling-rig orders in FY15. It still may not in FY16-17, with new contracts expected to come solely from offshore and conversion jobs.

We have removed revenue recognition of high-risk contracts from our earnings model. These include Sete Brasil deals, necessitating 15-23% cuts in FY16-17 EPS.
We estimate that Keppel may need to mark down its receivables and WIP by up to SGD1b to reflect their true market value in this depressed market.

The property sector’s has been in correction.
Keppel Land’s closest peer, CapitaLand, has shed 13% since the day KepLand announced its privatisation.
We now peg KepLand to CapitaLand’s current implied valuation of 0.75x P/BV.

In such onerous times, we want to price in more negatives than may potentially unfold. This gives us greater confidence in calling any stock bottom.
-  O&M.
  - We now value O&M by its net asset value. We adjust its NTA for potential writedowns in the event that high-risk contracts are cancelled. O&M’s value looks low as it does not include accumulated earnings with which it paid dividends to KepCorp. This has mostly been redeployed for other group businesses, mostly property, in our view.
-  Property.
  - Our Singapore property analyst, Derrick Heng, is positive on developers. His implied TP for Keppel Land’s closest peer, CapitaLand, is 0.9x P/BV. But as we are trying to price in as many negatives as possible, we prefer to peg Keppel Land to 0.75x P/BV. This is consistent with current valuations for CapitaLand.
Our SOTP value for KepCorp after a 10% conglomerate discount is SGD4.24. In the extreme case of a zero value for O&M, this value drops to SGD3.86.

Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-01-19

Maybank Kim Eng SGX Stock Analyst Report SELL Downgrade HOLD 4.24 Down 7.70