Keppel Corporation - DBS Research 2017-04-21: Boosted by Divestment Gains

KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Boosted by divestment gains

O&M segment barely breaks even in 1Q17.
Property earnings lower q-o-q due to timing of project launches.
Net earnings boosted by c.S$150m from divestment gains, write-backs, and mark-to-market of investments.

The acceleration of oil rebalancing following OPEC’s production cut should drive the recovery in rig demand and delivery of newbuild rigs on order.
Property, which accounts for 50-70% of the group’s bottom line, should continue to enjoy promising property sales in China and Vietnam, providing some cushion to the moderated O&M income and support our estimate of DPS of 20-24 Scts (3-4% dividend yield) for FY17-18F based on 40% payout ratio.
Our TP is lifted to S$6.00 as we roll over valuation to FY17 and imputed valuation for Keppel Capital.

In 4Q16, Keppel provided S$313m impairment for fixed assets, stocks & WIP and investments which largely arose from the O&M segment, partially offset by fair value gain on investment property. Stripping this out, PATMI would have been better than expected at c.S$300m (vs reported S$143m).
O&M segment reported a loss of S$138m due to provisions of S$270m in the quarter. Otherwise, it would have registered a stellar EBIT margin of 18.8% and PATMI of S$130m, aided by write-back, repair jobs and cost savings. Order wins in 2016 was rather low at S$500m.
We expect Keppel to secure S$1.5bn worth of new orders this year. Orderbook (excluding S$4bn Sete rigs) has dwindled to S$3.7bn, from S$5.1bn as at end-2015 and S$4.1bn a quarter ago.

Management remains optimistic of stronger home sales in China and Vietnam with 19k launch-ready homes in its pipeline through 2019, representing 3.3x of home sales in 2016.
The consolidation of Keppel’s asset management businesses under Keppel Capital that were completed in July 2016 strengthen its capital recycling platform and provide a steady stream of recurring income for the group.

In Apr-2017, Keppel Data Centres and Hong Kong’s PCCW Global launched the PCCW Global-Keppel International Carrier and Exchange in Hong Kong. The collaboration leverages on PCCW Global’s extensive global network connectivity and marks the expansion of Keppel T&T’s data centre footprint into Hong Kong.

We are leaving our forecasts intact for now, as headline profit made up 29% of our full year estimate. We will fine-tune our estimate as we get more clarity on O&M’s project status.
Our TP of S$6.00 is based on sum-of-parts :
1. O&M segment is valued at 2x P/BV,
2. infrastructure at 10x PE on FY16F earnings,
3. property segment at 0.85x P/BV,
4. Investment (Keppel Capital) at 15x PATMI, and
5. market values/estimated fair values are used for listed subsidiaries.
Our TP translates to 0.9x FY17 P/BV.

O&M segment could fare worse than expected. We forecast revenues from Keppel O&M falling to the ~S$3-4bn levels in each of FY17 and FY18, from S$7-8bn p.a. during FY12-14.
The continued depletion of its orderbook, and deferments/cancellations could pose downside risks to our forecast.

Pei Hwa HO DBS Vickers | http://www.dbsvickers.com/ 2017-04-21

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