Keppel Corporation - CIMB Research 2017-10-19: Diversification Merits

Keppel Corporation - CIMB Research 2017-10-19: Diversification Merits KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Diversification Merits

  • Keppel Corp (KEP)'s 3Q17 net profit of S$291m is slightly above our expected S$234m and consensus’ S$219m, driven by better-than-expected profits in investment and infrastructure.
  • 9M17 net profit of S$711m formed c.80% of our full-year forecast.
  • O&M achieved breakeven of S$0.2m net profit vs. core loss of S$17m in 2Q17.
  • Keppel Corp is reviewing the redevelopment of Keppel plot 4, 6 and Keppel Towers, affirming our view that it could be one of the biggest landbank owners in Singapore.
  • Maintain Add and unchanged SOP-based target price of S$8.58. 
  • Catalysts include divestment of undelivered rigs and special dividend for 50th anniversary in CY18.

Investment surpassed expectations 

  • Investment net profit for 3Q17 was S$53m, up 39% qoq and 194% yoy. 
  • 9M17 net profit of S$215m surpassed our S$193m expectation, mainly due to a S$17.3m profit on sale of investment (2Q17: S$14.8m) and fair value gain from investment of S$5.8m (2Q17: loss of S$35m). 
  • Keppel Capital continued to generate recurring income of c.S$17m/quarter. There was no sale in Tianjin Eco City in 3Q17. 
  • Keppel Capital’s AUM grew from S$25bn in 2Q17 to S$28bn now, including the recent S$500m from CPPIB into Alpha DC Fund.

Infrastructure boosted by stronger power, gas and desalination 

  • Infrastructure net profit for 3Q17 grew 63% qoq and 4% yoy to S$40m, on higher power and gas sales, as well as progressive recognition of the construction of the Keppel Marina East Desalination Plant. The recurring operational and maintenance of Doha plant also added to profits.

O&M achieved breakeven, on leaner operations 

  • O&M delivered a core net profit of S$0.2m, a turnaround from 2Q17’s core loss of c.S$17m. It secured S$1bn of non-drilling rigs jobs YTD, with its order book at S$3.9bn.
  • Management was encouraged by the latest secondary rig transactions but cautioned on a gradual recovery due to oversupply in the market. 
  • On undelivered jack-up rigs (refer to our recent report Keppel Corp - CIMB Research 2017-10-12: Unearthing gems), management is still pressing on for delivery, instead of selling at distressed price. Staff strength now at 16k vs. 36k at the beginning of 2015.

Property – redevelopment hopes in Singapore 

  • Property net profit for 3Q17 grew 106% qoq and 26% yoy to S$199m, which included S$79m in gains from the sale of Waterfront Residence Nantong. Home sales dropped 11% qoq to 1,320 units, dragged by China (-47% qoq) which was affected by cooling measures. However, we are hopeful that Keppel Land is reviewing the redevelopment of Keppel Bay Plot 4 and 6 as well as Keppel Towers. This reaffirms our view that it could be one of the biggest landbank owner in Singapore with unsold units of c.1400 units.

Net gearing improved to 0.5x 

  • Net gearing improved to 0.50x from 0.58x in 2Q17 with less working capital tied down in O&M and property. We think the divestment and investment gains had also boosted the cash balances. 
  • Relative to peers (Sembcorp Industries SCI and Sembcorp Marine SMM), its balance sheet position appears to be more resilient.

Maintain Add and target price of S$8.58 on SOP 

  • We make no changes to our EPS forecasts as investments and infrastructure offset the weak O&M. Keppel Corp (KEP) is our top pick in the O&M/conglomerate sector
  • Catalysts include
    1. divestment/delivery of deferred rigs (including Sete Brasil’s semi-subs),
    2. redevelopment of Keppel Towers, and
    3. 50th anniversary special dividend in CY18. 
  • Downside risks include weaker-than-expected home sales and sudden plunge in oil prices.

LIM Siew Khee CIMB Research | 2017-10-19
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 8.580 Same 8.580