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

Keppel Corporation - OCBC Investment 2016-10-21: Pay cut across the board KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Pay cut across the board

  • Lower than expected results.
  • Pay cut for all.
  • Possibly retrenchments ahead.

3Q16 results below ours and the street’s expectations 

  • 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.

Pay cut for all 

  • 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.

From natural attrition to possibly retrenchments 

  • 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.

Maintain HOLD 

  • 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 | 2016-10-21
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 5.71 Up 5.680