Keppel Corporation - CIMB Research 2016-01-22: Taking a chance with Sete Brasil

KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Taking a chance with Sete Brasil

FY15 net profit of S$1.525bn (+32% yoy) was 103% of our forecast.
S$230m provisions made for Sete Brasil projects were offset by S$129m revaluation gains in properties and data centres.
Final DPS of S$0.22 was declared, bringing FY15 DPS to S$0.34, representing a lower payout of 40% (FY15: 46%). Management guided that 40% is sustainable.

Maintain Hold with a lower RNAV target price (S$4.39), comprising mainly 30% discounted RNAV for properties, 2.5x O&M BV instead of previous basis of 11x CY17 profit due to challenging earnings outlook.

The S$230m provision made was derived based on the assessment of work-in-progress, receivables, costs liable to vendors as well as offsetting the US$1.3bn collected from Sete Brasil.
No profits were reversed during the quarter. The provision also did not take into account if all units were cancelled.
We estimate that c.S$1bn is still required to complete the first three units in the worst case of cancellation.
We have assumed zero contribution from Sete Brasil in our earnings.

O&M book value dropped from the historical average of S$2.4bn (FY12-9M15) to S$1.4bn as the unit gears up more loans for working capital, worsened by the poor earnings.
Interest expense for O&M shot up to S$19m in 4Q15 from an average of S$8m as at 9M15.
Group gearing stood at 0.53x as net debt grew to S$6.4bn from S$6bn in 9M15.

Excluding Sete Brasil’s provision, O&M EBIT margin was 17%, thanks to higher repair and upgrading jobs. However, we note that margins may dip to 10-12% as soon as recognition starts for Sete Brasil.
We expect 13% in our EBIT margin for FY15-18.

Enquiries remain for non-drilling projects as well as upgrades and conversions.
We have assumed S$1.5bn of orders for FY16-17 and S$2bn for FY18. KEP is expecting to deliver 25 projects in 2016, including the deferred units from Groupo R (three units), Parden Holdings (one) and Falcon (one). These units are technically accepted by the customers with delivery pending charter.

Higher home sales were made in Vietnam and China, with a total of 1,440 units sold in 4Q15. It plans to launch 4,114 homes in China and 1,973 homes in Asean and India.

Our EPS is adjusted by +1.3% and -8% in FY16-17 on higher property profit offset by zero recognition from Sete Brasil in FY17.
We believe the share price is likely to trade sideways, given the uncertainty in Sete Brasil’s outcome. Provisions made thus far could have provided some buffer, in our view.
We deem our valuation of the O&M at 2.5x book value (implied 7.7 x CY17 net profit) fair vs. the O&M ROE average of 35%.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-01-22

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 4.39 Down 7.12