Keppel Corporation - OCBC Investment 2016-10-21: Pay cut across the board

KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Pay cut across the board

Keppel Corp (KEP) reported a 40.2% YoY fall in revenue to S$1.5b and a 38.1% drop in net profit to S$224.5m in 3Q16, such that 9M16 net profit of S$640.9m accounted for 69% and 62% of ours and the street’s full year forecasts, respectively.
The drag came from Offshore & Marine, whose net profit was only S$11m in 3Q16, compared to S$166m in 3Q15 and S$61m in 2Q16. We note that a S$10m impairment was taken for plant and machinery for this segment.
Property’s net profit was S$157m in 3Q16, accounting for 70% of the group’s total net profit.
As for Infrastructure, the division delivered S$39m net profit after taking a S$24.5m impairment for Keppel T&T’s buildings in China.
Finally, the Investments division contributed S$18m of net profit in 3Q16.

Senior management across all of Keppel have taken a reduction in their monthly salary.
We understand that senior management in the O&M side will take a bigger pay cut compared to other divisions who are also reducing their salary as a form of solidarity.
Lower directors’ fees for 2016 will also be proposed at next year’s AGM.

In this quarter, Keppel O&M continued to rightsize, further reducing its direct workforce by about 3,080. This includes a reduction of around 660 in Singapore and 2,420 in the overseas yards.
For 9M16, Keppel O&M has reduced its direct workforce by close to 8,000 or around 26%. According to management, much of the reduction has been natural attrition. However, KEP will increasingly also look into early termination of contracts and selective retrenchment in Singapore.
The group is also looking into the possibility of mothballing some yards.

YTD, the O&M Division has secured new contracts worth about S$500m such that its net order book, excluding the Sete rigs, stands at S$4.1b.
We tweak our fair value estimate from S$5.68 to S$5.71 to incorporate changes in the value of KEP’s property segment and the group’s listed entities but maintain our HOLD rating; we would turn buyers around S$5.30.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2016-10-21

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 5.71 Up 5.680