Keppel Corporation - CIMB Research 2016-10-21: Managing costs and cash

Keppel Corporation - CIMB Research 2016-10-21: Managing costs and cash KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Managing costs and cash

  • 3Q16 net profit of S$224m (US$161m, -38% yoy, +9% qoq) missed our forecast by 18% and consensus by 27%. 9M16 NP formed 66% of our FY16 estimate.
  • O&M hit by lower-than-expected revenue and a S$10m (US$7m) impairment on PPE. Property’s net profit was not impressive despite divestment boost.
  • Infrastructure was the only division that spurred hope with steady operational and maintenance income. The division contributed 17% of the group’s NP in 3Q16.
  • Cost cutting measures are pertinent with salary cuts among senior management and O&M division. Divestment gains from property improved net gearing to 0.57x.

Potential for more impairment in O&M 

  • O&M’s 3Q16 net profit plunged 83% qoq to S$11m, largely affected by 
    1. a S$10m impairment on plant & equipment (details not disclosed) and 
    2. share of losses from associate, Floatel, of S$4.3m (as a result of dry-docking and accommodation units in between jobs). 
  • O&M reduced its direct workforce by c.3k in 3Q16 (660 in Singapore and 2,420 overseas), bringing the total cut in the division to 8k globally YTD. 
  • Mothballing of yards in the coming quarters could lead to more impairment in 4Q16, we believe.

Continuous dip in O&M revenue and margins 

  • O&M revenue was slower than our expectation, as it dipped 28% qoq with project deferrals. For now, there is only one jack-up rig for Falcon Energy that is still slated for 4Q16 delivery. All of the units have been deferred to 2017, the earliest. 
  • Operating margin (excluding impairment) came down to 11.4% (1H16: 13%) given the steep fall in revenue. 
  • We temper our EBIT margin assumptions to 11.5% from 12.8% and lower associates contribution to reflect the quarter.

Property lumpy, lifted by divestment gains 

  • Property’s 3Q16 net profit of S$157m (+66% qoq) included c.S$83m of gains from divestment of associates (Life Hub @ Jinqiao and 77 King Street). Stripping these, 3Q16’s net profit was down 22% qoq but we hope for a stronger showing in 4Q16 as earnings are lumpy. 
  • It sold 1,370 homes in 3Q16 (2Q16: 1,200) with steady volumes in China and Singapore while Vietnam’s sales more than doubled to 170 units (2Q16: 50).

Steady recurring income for infrastructure 

  • Excluding the net gain of S$5.4m from the disposal of data centres and impairment of logistics business, infrastructure’s net profit of S$33m (+18% qoq) was impressive, thanks to recurring income from operational & maintenance. 
  • We expect this to increase in FY17 as KEP handed over and commenced the O&M phase for sludge treatment facilities in Doha North Sewage Treatment Works.

Net gearing improved 

  • Net gearing of 0.57x was an improvement from 0.62x in 2Q16, helped by divestments in property, we believe. 
  • We expect the low activity in O&M to ease the cashflow requirement for the group.
  • Changes in working capital turned positive in 3Q16 (S$465m), a swing from 1H16.

Maintain Reduce and target price of S$5.14, still based on RNAV 

  • We cut our EPS by 2-3% for FY16-18F, mainly to reflect lower O&M revenue and margins. 
  • Re-rating catalysts could come from the settling of dust in O&M (Brazilian corruption scandal and potential impairment) and improvement in order wins.

LIM Siew Khee CIMB Research | 2016-10-21
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 5.14 Same 5.140