Keppel Corp - DBS Research 2016-03-11: More provisions?

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KEPPEL CORPORATION LIMITED BN4.SI 

Keppel Corp - More provisions? 

Reiterate HOLD with TP of S$5.25. 

• We prefer to monitor the development in Brazil and oil market before revisiting Keppel. We are wary of potential provisions of up to S$200m for the higher-risk non-Sete projects. 
• We have trimmed our FY16-17 PATMI by 1.5-2.8% in response to the further delay of Transocean units. 
• Its dividend yield remains decent at 5% despite the reduction in the payout ratio from 50% to a more sustainable 40%, still within its guidance of 40-50%. 
• Our SOP-based TP of S$5.25 implies 0.8x FY16 P/BV. 

Offshore & marine business weighing the group down. 

• The uncertainty in Brazil is worrisome. The key shareholder of Sete Brasil has voted against the filing of bankruptcy protection and the fate of Sete is dependent on Petrobras’ readiness to commit on a rig charter proposal. 
• The O&M outlook is also plagued by the depressed oil prices. Rigbuilding is entering a prolonged cyclical downturn and competition has intensified. 
• Keppel secured S$1.8bn non-rig new orders last year, a far cry from its usual S$4- 6bn wins. As a result, its orderbook dwindled to S$9bn, from S$12.5bn a year ago, thereby implying declining topline and earnings moving ahead. 

Property business is a mixed bag; infrastructure should bottom out. 

• Keppel sold over 4,570 homes in FY15, with 72% from China alone, marking an improvement over the total of 2,400 sold in FY14. Management is optimistic of stronger home sales in 2016. 
• For infrastructure, with the handover of both phases of the Greater Manchester EPC project and the Doha North sewage treatment project having incurred its final provision of just under S$200m in FY15, Keppel Infrastructure should see its profitability improve thereafter. 

Valuation: 

• Our TP of S$5.25 is based on sum-of-parts : 
  1. O&M segment is valued at 2x P/BV, 
  2. infrastructure at 10x PE on FY16 earnings, 
  3. property segment at 0.85x P/BV, and 
  4. market values/estimated fair values are used for listed subsidiaries. 

Key Risks to Our View: 

• O&M segment could fare worse than expected. 
• We forecast revenues from Keppel O&M falling to the ~S$5.4bn and S$5.8bn levels in FY15 and FY16, respectively, from S$7-8bn p.a. during FY12-14. 
• The collapse of Sete Brasil and continued depletion of the orderbook, coupled with deferments, could pose downside risks to our forecast. 

Janice CHUA DBS Vickers | Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2016-03-11

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 5.25 Same 5.25