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

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.



Reiterate HOLD with TP of S$5.25. 

  • 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

  • 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.


Property business a silver lining; Keppel Capital formation completed. 

  • 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.


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. 
  • This translates to 0.8x FY16 P/BV.


Key Risks to Our View:

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


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