Keppel Corporation - CIMB Research 2017-07-21: Property Proxy, But O&M Weakness Still Matters

Keppel Corporation - CIMB Research 2017-07-21: Property Proxy, But O&M Weakness Still Matters KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Property Proxy, But O&M Weakness Still Matters

  • Keppel Corp's 2Q17 net profit of S$160m missed our expectation of S$230m and consensus’ S$204m. 1H17 net profit formed 44% and 48% of our and the market’s FY17F.
  • O&M did not recover qoq with S$1m of net profit in 2Q17, which was propped up by gains from the sale of PPE.
  • Property remained steady from stronger sales in Singapore and completion in China.
  • Maintain Hold and target price of S$7.24, based on SOP. Despite being viewed more as a proxy to the property sector, O&M weakness may still matter for now.

O&M in a loss if not for sale of assets 

  • We had been too aggressive in our O&M revenue recognition; hence the S$448m (-7% qoq) was a miss. EBIT of S$32m and margin of 7.2% in 2Q17 (1Q17: 0.8%) was helped by the sale of PPE (c.S$15m) from the mothballing of yards including the closure of Verolme (S$3m). A vessel off-charter from Floatel also resulted in the share of associates to drop to S$6m (1Q17: S$22m). 
  • Looking ahead, there could be more asset sales from mothballing exercises to cover the division’s interest expense of c.S$40m/quarter.

We believe in the LNG vision but it takes time 

  • We are positive on O&M’s vision to step out of drilling to be an enabler in the entire suite of gas solutions from FLNG, FSRU to LNG vessels and bunkering. However, we believe the materialisation of orders takes time given the size and less commoditised structure.
  • We believe the market could have already pencilled in order expectations from this. YTD order wins were c.S$300m with its order book at S$3.4bn. We lower our order target from S$2bn to S$1.5bn and cut our EBIT margin from 8% for FY17 to 5% to reflect 1H17.

Property – positive with disciplined bids 

  • 2Q17 property net profit was steady at S$97m (+2% yoy, -6% qoq), with the help of more completion in China and strong sales in Singapore residential properties. Management is confident of the complete sale of the Singapore properties before its ABSD deadline - The Glades (Oct 17: 15 units) and Highline Residence (2Q18: 119 units). 
  • KEP is not in a hurry to bid aggressively on new sites given its ample landbank (Keppel Bay Plot 4 and plot 6) as well as redevelopment potential in Keppel Towers.

Investment swings 

  • The division turned in an operating loss of S$16m, affected by fair value loss qoq from KrisEnergy warrants as at end-2Q17. The lumpiness in land sale in Tianjin Eco City also resulted in lower qoq net profit (S$38m) in investment. We estimate land sale profit to be S$2m in 2Q17 vs. more than S$100m in 1Q17 from the sale of three parcels of land.
  • Tianjin Eco City remains as a crown jewel in the long-term. 7,500 sm of land were sold in 2017 as selling prices doubled to Rmb13,800/sm from Rmb6,300/sm in 2016. Management believes the prices may trend at a more sustainable pace ahead.

Maintain Hold and SOP-based target price of S$7.24 

  • Net debt remained steady at 0.58x in 2Q17. Interim DPS remained unchanged yoy at S$0.08. 
  • We cut our EPS by 12-13% for FY17-19 to reflect weaker O&M revenue and margin. 
  • At Keppel Corp's current share price, KEP SOP implies 1x FY17 P/BV of O&M and 0.8 FY17x P/BV of property, in line with its Singapore peer, Capitaland (0.87x). 
  • Although the stock is increasingly being viewed as a property developer proxy, we believe O&M orders could still be a key re-rating catalyst. 
  • Downside risk is the slump in oil price.

LIM Siew Khee CIMB Research | Cezzane SEE CIMB Research | 2017-07-21
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 7.240 Same 7.240