Keppel Corporation - CIMB Research 2016-07-22: Awaiting for other pillars to grow

Keppel Corporation - CIMB Research 2016-07-22: Awaiting for other pillars to grow KEPPEL CORPORATION LIMITED BN4.SI 

Keppel Corporation - Awaiting for other pillars to grow

  • 2Q16 net profit of S$206m was below our and consensus expectations. 1H16 NP formed 37% of our FY16 forecast on weaker O&M and higher net interest costs.
  • O&M’s revenue and margin shrank qoq despite rationalisation efforts. Property’s profit was not spectacular, although home sales were higher qoq.
  • 2Q16 net gearing was up at 62%, from 52% in 1Q16. DPS of S$0.08 was declared for 1H16, representing a 35% payout
  • Accelerate of earnings growth from infrastructure and investments is much needed to fill the O&M vacuum. Maintain Reduce and target price still based on RNAV.

Belt tightening in O&M

  • O&M’s profit slid 35% qoq to S$61m (US$44m) on slower-than-expected revenue recognised from more deferrals. 
  • Order book stood at S$4.3bn (US$3.2bn), with S$460m (US$338m) contracts won YTD, in line with our expectations. However, EBIT margin weakened to 12.8% (1Q16:13.6%), despite overheads slashed by c.20% (laying off 4,900 direct work force and 670 sub-con in 1H16). 
  • More cost cutting measures ahead including mothballing yards with low volumes. Sete Brasil saga continues to drag on.

No further provisions required

  • Four more jack-up rigs were being deferred from 2016 to 2017 (3 units for Grupo R and 1 for Parden Holdings) with compensation. 
  • Despite seeing a quarterly trend of deferrals, management was confident that no provision for impairment is required, citing vigorous assessments by auditors. 
  • With Mexican Perforadora Central’s JU being delivered in Jul 16, KEP has one more JU for 2H16 delivery for Singapore Falcon.

Property, the sole growth pillar

  • Property’s profit was not spectacular at S$95m (US$70m) -4% qoq,-19% yoy. KEP sold 2,140 homes in 1H16 vs. 1,820 in 1H15. 1,200 homes were sold in 2Q16 (1Q16:940), of which 1,020 were from China (Chengdu, Wuxi and Tianjin). 
  • Vietnam’s residential sale of 50 units in 2Q16 was similar to that achieved in 1Q16. We expect to see more completions in 2H16 driving higher earnings from the division.

Stretching infrastructure and investment

  • Infrastructure’s profit doubled qoq to S$28m (US$20m) thanks to higher operational and maintenance income from Doha and KIT’s Senoko plant. This has helped to mask the weak power prices in Singapore. 
  • Investments turned around with a S$22m (US$16m) profit in 2Q16 in the absence of equity loss from KrisEnergy
  • The formation of Keppel Capital, incorporating K-REIT management, Alpha Investment and Keppel Infrastructure Fund as well as 50% of KDC management could intensify the group’s capital recycling.

Balance sheet weakens but DPS sustainable

  • Net gearing worsened to 0.62x in 2Q16 to support higher working capital requirements for the O&M and property divisions. 
  • Operating cashflow was a negative S$361m (S$265m) for 1H16. However, management expects this to stablise as working capital for O&M has peaked. Therefore, we think the dividend payout of 40% is still achievable.

Maintain Reduce and target price of S$5.14

  • We cut our EPS by 9-14% for FY16-18F on lower O&M revenue, EBIT margin and higher interest costs. 
  • Our target price remains unchanged, still based on RNAV.

LIM Siew Khee CIMB Securities | 2016-07-22
CIMB Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 5.14 Same 5.14