Keppel Corporation (KEP SP) - UOB Kay Hian 2017-12-07: Re-Enter The Dragon; Tianjin To Drive Property Earnings

Keppel Corporation (KEP SP) - UOB Kay Hian 2017-12-07: Re-Enter The Dragon: Tianjin To Drive Property Earnings KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation (KEP SP) - Re-Enter The Dragon: Tianjin To Drive Property Earnings

  • Going through Keppel Corp’s property portfolio shows that earnings will largely come from its Tianjin Eco City project, with projects in Wuxi coming in a close second.
  • China will be the key earnings focus, considering that the recent cooling measures have had an impact on sales momentum, but less on prices. Divestment of its projects in non-core cities could see RNAV upside of 2.2%. 
  • Our property RNAV rises to S$5.66/share, raising our SOTP-based target price to S$8.98. Maintain BUY.

Earnings in 2018-19 largely driven by China; watch Tianjin closely. 

  • Keppel Corporation’s (Keppel) property earnings will largely come from China, accounting for 60- 85% of our property trading profit forecasts for 2017-19. This will primarily be driven by phased project launches from Tianjin Eco-city and secondary contributions from projects in Wuxi. 
  • Singapore earnings will mainly be driven by sales of its Corals at Keppel Bay project. 
  • Vietnam has a 5-13% earnings contribution at best.

Homes sales remain steady in China, despite cooling measures. 

  • Property cooling measures implemented earlier this year have impacted Keppel’s home sales. This was most apparent in 3Q17, where homes sales fell 48% yoy. However, its projects still retain pricing power, with prices remaining flat despite the measures. 
  • Sales continue at a steady clip, though the coming quarters will reveal whether this remains the case. 

Divestment of projects in non-core cities to provide property RNAV upside of 2.2%.

  • Assuming its projects in non-core cities in China are divested, similar to the Keppel Cove Zhongshan transaction, our un-discounted property RNAV will rise by another 15 S cents (+2.2%).


Raising property RNAV to S$5.66/share. 

  • We have reviewed our property RNAV, post a granular examination of Keppel’s residential landbank and investment properties. Our valuation rises from S$4.85 to S$5.66 on the following factors:
    1. incorporation of development surpluses from Keppel’s investment properties under development,
    2. an increase in development surpluses from its properties, and
    3. a shift to valuing its Keppel REIT stake at UOBKH’s revised target price of S$1.43 (vs market value previously, see report: Singapore Property & REIT Sector 2018 Strategy - Riding The Wave).

Increase largely due to development surpluses from investment properties. 

  • The development surpluses of S$766m make up for ~40% of the increase. The remainder is almost equally split between the higher valuation for its Vietnam landbank (due to Saigon Sports City) and the valuation surplus from Keppel Reit (previously a deficit). This is discounted by 20%, comparable with the 22% average discount for tier-1 Singapore developers.

Discounting project profits with no launch plans over 2017-19 by 10 years. 

  • In deriving our property RNAV, we have discounted profits for projects with no launch plans over 2017-19 by 10 years. Adjustments were made for projects where we are aware of the time line to launch. The years we have discounted it by seems fair considering that Keppel is a long-term developer, and is not rushed to develop its landbank. 
  • Furthermore, some of its landbank has historically taken as long as 15+ years to realise profits (8 Park Avenue, Keppel Bay plots).

Bulk of property RNAV value lies in China. 

  • The bulk of the property RNAV stems from China, largely driven by its projects in Wuxi and Tianjin. These collectively make up 10% of our property RNAV. 
  • Other projects that significantly contribute to the property RNAV (> S$150m) are its Keppel Bay projects (Corals, Reflections) and Empire City in Vietnam.

Sensitivity analysis shows RNAV most sensitive to China ASP. 

  • It comes as no surprise that our RNAV is most sensitive to ASP changes in China, given the large portfolio exposure. 
  • We estimate that every 5ppt change in ASP for its China projects in 2018, ceteris paribus, impacts our un-discounted RNAV by 2.5%. Singapore and Vietnam show the least impact, at about 0.5% each.

Target price rises to S$8.98. 

  • We have shifted our valuation to 2019. Factoring in our revised RNAV, as well as contributions from Keppel-KBS REIT, our SOTP-based target price for Keppel rises to S$8.98 (previously S$8.35). 
  • We have revised our P/B for the O&M division from 1.0x 2018F P/B to 0.9x 2019F P/B to reflect continued risks in this division.

Maintain BUY, improvement on multiple fronts to drive re-rating. 

  • We maintain our BUY call, premised on several fronts:
    1. the worst largely over for the O&M division though we do not discount further kitchen sinking,
    2. rebound in Singapore property market and continued strong homes sales overseas to buoy earnings,
    3. doubling of Keppel Capital’s AUM from S$25b which will drive incremental earnings growth for Keppel.

Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-12-07
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 8.98 Up 8.350