Keppel Corp - DBS Research 2016-04-19: A disappointing quarter

Keppel Corp - DBS Research 2016-04-19: A disappointing quarter KEPPEL CORPORATION LIMITED BN4.SI 

Keppel Corporation - A disappointing quarter 

  • 1Q16 results below on weaker O&M 
  • Trimmed FY16F earnings by 8% factoring in further deferments 
  • Rigbuilding outlook remains challenging 
  • HOLD for dividend yield and oil recovery; TP S$5.25 


Reiterate HOLD with TP of S$5.25. 

  • We would like to monitor the development in Brazil and oil market before revisiting our rating on Keppel. 
  • We are wary of potential provisions of up to S$200m for the higher-risk non-Sete projects, though management guided that it is not required at this juncture. 
  • Nevertheless, its dividend yield remains decent at 4%, assuming 40% payout ratio. 
  • Our SOP-based TP of S$5.25 implies 0.8x FY16 P/BV. 


Offshore & Marine weighing the group down, again. 

  • Keppel reported a weak 1Q16, which saw PATMI falling 41% y-o-y to S$211m, below our 10%-below-consensus forecast. 
  • The key culprit was the O&M segment, dragged by project deferments and suspension of Sete projects, partially offset by 28% reduction in headcount. Besides Transocean’s deferments in 1Q16, several other jackup projects have also been pushed back while the first Sete project is only expected to be delivered in 2017. 
  • We have adjusted our delivery schedule and trimmed FY16F PATMI by 8%. 

Rigbuilding is in a prolonged cyclical downturn. 

  • Keppel secured S$1.8bn non-rig new orders last year and S$510m YTD, a far cry from its usual S$4-6bn wins. As a result, its orderbook has dwindled to S$8.6bn, from S$9.0bn a quarter ago, thereby implying declining topline and earnings ahead.


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


  • 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 FY16F 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$4.1bn and S$5.8bn levels in FY16 and FY17, respectively, from S$7-8bn p.a. during FY12-14. 
  • The collapse of Sete Brasil and continued depletion of its orderbook, coupled with deferments, could pose downside risks to our forecast. 



Janice CHUA DBS Vickers | Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2016-04-19
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 5.25 Same 5.25


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