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.

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.

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’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).

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 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.

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 | http://research.itradecimb.com/ 2016-10-21

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