Keppel Corporation (KEP SP) - UOB Kay Hian 2017-07-21: 2Q17 Earnings Below Expectations; Keppel Capital To Drive Growth

SGinvestors.io

KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation (KEP SP) - 2Q17 Earnings Below Expectations; Keppel Capital To Drive Growth

• Keppel reported 2Q17 core net profit of S$147.3m, below expectations. 
• Higher earnings from O&M was largely offset by higher net interest expense. Except for the Infrastructure division, the other units saw better performance. 
• The O&M contracting outlook remains difficult. Keppel Capital targets to double AUM in five years as it grows earnings from the division. 
• We revise earnings by 1-3% and roll over to 2018 target price of S$6.86. 
• Near-term earnings catalysts are not apparent, maintain HOLD. Entry price: S$6.20.

RESULTS

2Q17 core net profit of S$147.3m, below expectations. 

• Keppel Corp (Keppel) reported headline net profit of S$160.3m (-22.1% yoy, -38.4% qoq). 
• Included in the results were S$12.9m in net one-offs, which included fair value losses on KrisEnergy warrants, forex gains, profit on sale of fixed assets and investments. Excluding these one-offs, core net profit was S$147.3m (-21.8% yoy, +42.1% qoq). 
• Results were below expectations, with 1H17 core net profit coming in at 33% of our core full-year estimate. 
• The weakness stemmed mainly from the Offshore & Marine (O&M) segment, which recorded 1H17 earnings of S$1.4m, significantly below our estimates.

O&M improves in 2Q17, but barely breaks even. 

• The O&M division reported an improvement in operating profit, which came in at S$32.3m and an operating margin of 6.4% (1Q17: S$3.7m, operating margin: 0.8%). Despite the improvement, this was largely offset by higher net interest expense. 
• Owing to results from share of associates, the division was able to report a marginal net profit of S$1.3m. 
• Bottom-line could have been worse, if not for the sale of fixed assets (S$17.1m), which we understand to mostly comprise of yard fixed assets from the O&M division.

No new orders, three projects deferred, Gandria FID in 2H17. 

• No new orders were announced during the 2Q17 results, a continued reflection of the challenging environment. 
• Orderbook stands at S$3.4b, excluding projects for Sete Brasil. There was nothing to update on Sete Brasil. Three projects were deferred: 
  1. two semisubmersibles were moved from 2019 to 2020, and 
  2. the liftboat for Crystal Heights was also deferred from 2018 to 2019. 
• Keppel will be compensated for the deferral. The Gandria project is expected to receive Notice to Proceed after FID is achieved in 2H17.

Property earnings flat at S$96.6m. 

• Keppel’s property unit reported higher revenue of S$542.2m (+15.7 yoy, +106.9% qoq), with net profit largely flat at S$96.6m (+5.2% yoy, - 6.0% qoq). The division saw strong home sales for the quarter at 2,470 units, driven mostly by strong sales in China (1,080 units, +6% yoy) and Vietnam (280 units, +600% yoy). 
• Profit from sale of some 5,860 units of overseas homes sold is expected to be progressively recognised over 3Q17 to 2019.

Infrastructure earnings lower at S$24.6m. 

• The division saw higher revenue of S$521m (+28.9% yoy, +11.5% qoq) but lower earnings of S$24.6m (-11.2% yoy, -23.5% qoq). The quarterly difference was due to the inclusion of a one-off divestment gain of GE Keppel Energy Services (est. S$4.5m). 
• Keppel’s Logistic business is undergoing a transformation that is not expected to see a turnaround till 2019.

Investments sees net profit of S$37.8m. 

• Net profit was higher at S$37.8m (+52.0% yoy), driven by higher asset management earnings of S$20m (+43% yoy, +54% qoq) and higher other investment income of S$18m (+64% yoy, -84% qoq).
• The higher investment income was likely due to the disposal of listed equities and equity funds, offset by losses from fair value losses on KrisEnergy warrants.

Net gearing largely unchanged at 0.58x, compared with 0.57x in 1Q17. 

• Management opined that debt has largely stabilised, and the combination of fixed and floating rate on their debt should help them manage a rising interest rate environment.

Interim dividend of 8 S cents declared. 

• Keppel maintained its interim dividend of 8 S cents, owing to its “comparable 1H17 earnings performance with 1H16”.

STOCK IMPACT

O&M: Subtle shift in language on non-drilling, oil-related contracts. 

• The contracting outlook for the O&M division remains moribund. Keppel’s language on its targeted opportunities has subtly shifted from “non-drilling solutions” to “non-oil and gas plays” and “gas industry”. This hints at the difficulty of securing non-drilling orders (ie FPSOs, FSOs, etc.) despite the uptick in oil prices. 
• We envision that going forward, Keppel will focus more on developing its gas solutions product offering as detailed in its earlier gas strategy presentation. This venture looks promising, given the potential recurring earnings stream from being a co-owner (and co-developer). 
• We re-iterate that this strategy will take a few years to play out.

Keppel Capital targets to double S$25b AUM in next five years. 

• In a growing shift towards developing Keppel as an asset manager, it was announced that Keppel Capital aims to double its S$25b AUM in the next five years. This will be achieved through its O&M, Infrastructure, Data Center and Property verticals, where Keppel has expertise to create and develop these asset classes and manage them.

Will continue to review options on M1. 

• Keppel’s subsidiary Keppel T&T announced that it had ended its strategic review on M1. Keppel will continue to review its options regarding the matter.

EARNINGS REVISION/RISK

Tweak earnings by 1-3%. 

• We have made various tweaks to our assumptions for each business unit. Central to our changes is a reduction of the O&M division’s profitability, partially offset by an upward revision of the Infrastructure and Investment earnings. 
• Our revised earnings for 2017-19 is S$742m (-2%), S$805m (+1%) and S$888m (+3%) respectively.

VALUATION/RECOMMENDATION

Maintain HOLD, roll over to 2018 target price of S$6.86. 

• We roll our SOTP target price over to 2018, which rises to S$6.86. 
• The changes largely stem from an upward revision of the valuation from Keppel Capital, where we have increased our earnings forecast. 
• Well implemented cost controls on the O&M front, steady earnings from the Property division and growing Investment income will result in earnings largely bottoming out. 
• While we appreciate Keppel to be on the long-term path of earnings recovery, there are no near-term earnings catalysts. Thus, we maintain HOLD. Entry price: S$6.20.

Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-07-21

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 6.86 Up 6.550