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

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. 

■ S$230m provision made for Sete Brasil 

  • 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 shrank 

  • 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. 

■ Margin, a double-edged sword 

  • 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. 

■ Order book at S$9bn, 30% non-drilling KEP secured S$1.8bn of orders in FY15. 

  • 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. 

■ Property still doing well in China and Vietnam 

  • 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. 

■ Maintain Hold 

  • 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 | 2016-01-22
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 4.39 Down 7.12