Keppel Corporation - OCBC Investment 2017-01-27: Impairments with right-sizing of yards

Keppel Corporation - OCBC Investment 2017-01-27: Impairments with right-sizing of yards KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Impairments with right-sizing of yards

  • Weaker than expected results.
  • S$270m O&M impairments in 4Q.
  • Final div of S$0.12/share.

4Q16 results below expectations 

  • Keppel Corp (KEP) reported a 21.8% YoY drop in revenue to S$1.9b and a 64.7% fall in net profit to S$143.1m in 4Q16, bringing full year net profit to S$783.9m. This was a 48.6% drop compared to 2015, and was below expectations, accounting for 92% and 85% of ours and the street’s full year estimates, respectively. 
  • There were lower contributions from O&M and provisions for impairment of S$336m in 2016.
  • Excluding revaluations, impairments, divestments and major provisions, net profit was S$300m in 4Q16, comparable with that of 4Q15.

Hit by impairments and provisions; mothballing supporting yards

  • In 4Q16, KEP incurred impairments of S$87.4m for fixed assets, and S$120.8m for investments and associated companies. 
  • There were also provisions of S$81.2m for stocks and work-in-progress, and S$11.6m for doubtful debts. 
  • In 2016, the O&M division saw impairments of S$277m; about S$270m was incurred in 4Q16, resulting in net profit of S$29m for FY16. 
  • With the tough operating environment, apart from reducing variable costs, KEP has also cut its overheads, achieving cost savings of about S$150m year-on-year. The group has mothballed two overseas yards (Bintan, Brazil) and is in the process of closing three yards in Singapore; these are mainly supporting facilities.

Property to continue to buttress the group 

  • In comparison, 2016 was a good year for the property division, with net profit of S$620m.
  • Keppel Land reported higher net profit of S$586m compared to S$564m in 2015. About 5,720 homes (+25% compared to 2015) were sold in 2016, comprising 3,800 in China, 1,520 in Vietnam and 380 in Singapore. 
  • Looking ahead, the group still expects healthy sales figures for China and Vietnam.

S$0.20/share total dividend for FY16 

  • A final dividend of S$0.12/share has been declared, and together with an earlier interim dividend of S$0.08/share, the total dividend for FY16 was S$0.20/share (payout ratio 46%). This compares with S$0.12 interim and S$0.22 final in 2015. 
  • Following the impairments taken and the recovery in oil prices, we increase our P/B for the O&M segment from 0.8x to 0.9x, and also update other estimates in our SOTP valuation.
  • This results in a higher fair value estimate of S$6.26 (prev. S$5.71). Maintain HOLD.

Low Pei Han CFA OCBC Investment | 2017-01-27
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 6.26 Up 5.710