Keppel Corp
KEPPEL CORPORATION LIMITED
BN4.SI
Keppel Corp - Market Misperceptions Strengthen Conviction BUY
- Keppel has put Sete Brasil behind it by making provisions on most of the recognised income, contrary to the market perception that the issue remains a key risk.
- Maintain BUY with SOP-based SGD8.08 TP.
- O&M earnings only formed 32% of FY15 PATMI, juxtaposed against the stock’s 90% correlation with oil.
- The market has underestimated the O&M division’s resilience, and has oversold the stock as though it were a pure play on oil. The 6.8% yield is highly sustainable.
Provisions made for 67-94% of Sete Brasil income.
- Assuming 10%/12%/14% margins on the SGD2.5bn revenue recognised, Keppel’s SGD230m provision has effectively written off 67-94% of the last three years’ profits on the Sete Brasil rigs.
- Even in the worst case where projects are cancelled without a plan for the rigs, the remaining write-off would not have much impact on the group’s bottomline.
Offshore & marine (O&M) still healthy.
- Recent media headlines using the terms “dire straits”, “in deep water” etc have blown the issue out of proportion, in our view.
- We now assume 0% contribution from the Sete Brasil rigs in FY16 with construction suspended.
- Keppel beat street estimates – delivering a 17.1% O&M operating margin in 4Q15 (excluding the provision), due to a larger percentage of higher-margin repair/conversion work.
- Cost cuts would also help to buffer margins – 2,000 of the 6,000 direct labour cuts were in Brazil, which management said would have cost c.SGD100m a year.
- For FY16F-18F, we expect O&M income to be 31-37% of the group’s bottomline. These represent ROEs of 33-42% on the O&M segment’s net assets, justifying our 3.4x P/BV peg in the SOP.
O&M forms only 32% of group income and 11.5% of NAV.
- The other market misperception is that Keppel is heavily dependent on O&M, resulting in the stock’s 90% 1-year correlation with oil prices.
- Interestingly, the stock trades with an implicit valuation of the O&M business of negative-SGD1bn, indicating the selloff has gone too far.
Dividend lowered to 34 cent per share, and this is sustainable.
- The final dividend was 2 cent lower than our forecast, representing a 40.3% payout ratio.
- Management reiterated that Keppel aims for a payout ratio of 40-50%. Even if earnings fall to SGD1.23bn, a 50% payout ratio yields a 34 cent dividend, implying that FY15 dividend is highly sustainable The stock trades at a compelling 6x FY16F P/E and 0.8x P/BV.
Lee Yue Jer CFA
RHB Invest
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http://www.rhbinvest.com.sg/
2016-01-25
RHB Invest
SGX Stock
Analyst Report
8.08
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8.08
