Keppel Corporation - CIMB Research 2018-01-26: Hopeful Of Happy Days Ahead

Keppel Corporation - CIMB Research 2018-01-26: Hopeful Of Happy Days Ahead KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Hopeful Of Happy Days Ahead

  • Keppel Corporation's FY17 net profit of S$218m included S$619m Brazilian penalty. Ex-fine, net profit would have been S$836m, broadly in line with our expectation of S$857m.
  • O&M had kitchen-sinking provisions of c.S$140m and ran into operating loss of S$75m in 4Q17 due to weak operating leverage and deferral of some projects.
  • Management is positive on the overall oil & gas sentiment, and hopes to see a more fruitful year ahead (read: stronger orders). It secured S$1.2bn of orders in 2017.
  • Excluding the fine, net gearing remained at 0.51x. With final DPS of S$0.14, FY17 DPS met our forecast of S$0.22.
  • Maintain ADD, with a higher SOP-based Target Price of S$10.00.

FY17 would have been a beat if not for fine and kitchen sinking 

  • Keppel Corp's FY17 net profit of S$218m included c.S$140m of kitchen-sinking provisions (c.S$81m: Sete Brasil, c.S$10m: yard closure and c.S$49m of provisions for doubtful debts and impairment of associates). Excluding the penalty and provisions, net profit would have been S$976m. 
  • The kitchen-sinking exercise excludes the 11 undelivered jack-up rigs. We believe write-downs pertaining to these rigs would be evaluated upon sale. Discussion is ongoing with Borr for the latter to take on some rigs (number of units unconfirmed).

Expect a more fruitful year for O&M (read: stronger order hope) 

  • Offshore & marine (O&M) ran into c.S$75m operating loss in 4Q17 as some projects were deferred. The cumulative effect of slower order wins over the years also caught up with the unit and weakened its operating leverage. However, management is optimistic on the overall industry and expects a better 2018 on firmer oil prices. 
  • We raise our FY18 order win assumption from S$2bn to S$3bn, but still expect few drilling rig orders. Our FY18-20F EBIT margin forecasts ranged from 7-9%. End-FY17 order book was S$3.9bn.

Property lifted by revaluation gains of S$178m 

  • Keppel Corp's FY17 property net profit of S$685m included revaluation gains of investment properties overseas. The S$250m divestment gain from Zhongshan marina development is still pending a court appeal. 
  • China home sale rose 136% q-o-q to 1,345 units in 4Q, or 3,725 in FY17 despite cooling measures. Total FY17 home sale declined 4% y-o-y to 5,480 units due to lower sales in Vietnam. 
  • Management reiterated the potential redevelopment of Keppel Towers and Nassim Woods, adding 500 homes in Singapore from current 1,200.

Keppel Capital growth engine, infrastructure steady state 

  • Keppel Capital’s net profit grew 30% y-o-y in FY17 to S$83m. We expect the growth momentum to sustain on the back of growing asset under management (AUM, currently S$29bn). 
  • FY17 infrastructure net profit was S$132m, slightly above our expectation. The S$5.3bn joint project won in Dec 17 with Zhen Hua to build HK’s first independent waste management facility (to be ready by 2024) will enhance its operational & maintenance earnings visibility. 
  • Recurring income formed about S$160m of revenue in FY17.

The worst is over, a lot to look forward to 

  • We see multiple catalysts ahead, including
    1. stronger O&M orders,
    2. sale of jack-up rigs to Borr or any buyer,
    3. restarting the stopped-work semi-submersible for Sete Brasil/ Petrobras pending the finalisation of their restructuring plans, and
    4. divestment gain from Zhongshan as well as redevelopment plans for Singapore properties. 

Maintain Add.

  • Our Target Price rises to S$10.00, still based on SOP. 
  • We raise our FY18-19F EPS to factor in higher O&M orders, stronger growth in investment, and divestment gain of ZhongShan.

LIM Siew Khee CIMB Research | 2018-01-26
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 10.00 Up 8.580