Keppel Corp - DBS Research 2016-07-22: Property a silver lining

KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corp - Property a silver lining

2Q16 results below on weaker O&M.
Trimmed FY16-17 earnings by 12-14%, factoring further deferments and lower order wins.
Promising property outlook in China and Vietnam.
HOLD for decent yield and oil recovery; interim dividend of 8 Scts declared.

We believe the negatives for Offshore & Marine (O&M) business are largely priced in.
Property has taken over from O&M as Keppel Corp (Keppel)’s largest earnings contributor, accounting for nearly half of the group’s bottomline since 4Q15.
The promising property sales in China and Vietnam will provide some cushion to the plummeting O&M income and support the current 4% dividend yield based on 40% payout ratio.
Recovery in oil price and O&M sector remain key re-rating drivers.

O&M earnings continue to slide, churning only S$61m net earnings in 2Q16, which is 78% off its recent peak of S$287m in 4Q14 and 35% lower q-o-q. This led to group earnings falling by 45% y-o-y to S$416m in 1H16, making up only 38%/36% of ours and consensus’ estimates.
We have trimmed FY16-17F earnings by 12-14% after adjusting the delivery schedule, removing contribution from Sete rigs and lowering order win assumptions.
Year-to-date (YTD) order wins is lagging behind at S$460m. We now expect Keppel to secure only S$1.5bn worth of new orders this year, slightly lower than S$1.8bn last year. Orderbook (excluding Sete rigs) has dwindled to S$4.3bn, from S$5.1bn as at end-2015.

Management is optimistic of stronger home sales in China and Vietnam with 18.5k launch-ready homes in its pipeline through 2018, representing 4x its home sales in 2015.
The consolidation of Keppel’s asset management businesses under Keppel Capital was completed in July, strengthening its capital recycling platform and providing a steady stream of recurring income for the group.
Management denied intention to list Keppel Capital in the near term.

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.
This translates to 0.8x FY16 P/BV.

O&M segment could fare worse than expected. We forecast revenues from Keppel O&M falling to the ~S$3bn levels in each of FY16 and FY17from S$7-8bn p.a. during FY12-14.
The continued depletion of its orderbook, and deferments/cancellations, could pose downside risks to our forecast.

Janice CHUA DBS Vickers | Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2016-07-22

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