Keppel Corporation - DBS Research 2018-01-26: Out Of The Woods

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KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation -  Out Of The Woods 

• FY17 below due to further provisions and impairments on O&M.
• O&M in the red but outlook is improving with stronger enquiry levels.
• Steady contribution from Tianjin Eco-City land sale.
• Reiterate BUY; Target Price adjusted slightly to S$10.20.

Reiterate BUY with Target Price of S$ 10.20.

• FY17 earnings were below expectations due to further provisions for Sete projects and asset impairments that amounted to S$135m in total. Our TP is adjusted down slightly after factoring in the lower O&M book value. 
• Keppel is a safer bet to ride on property re-rating and O&M recovery. 
• Keppel’s decent dividend yield of 3% (based on 40% payout ratio) also lends support to its share price. 

Where we differ: Property’s steep discount to RNAV poised to narrow. 

• Keppel’s property segment remains undervalued, notwithstanding Keppel’s huge historical landbank of 6.5m sqm held at a low cost. Half of the landbank is currently under development, realising its RNAV over the next 3-5 years. 
• Out of its remaining undeveloped landbank, 40% is for development projects in Tianjin Eco-City, which Keppel acquired in 2009 at less than one-tenth of the current land price which is yet to be reflected in our RNAV. 
• In addition, the ongoing portfolio rebalancing exercise will unlock values of completed projects. Hence, we believe the current steep 30% RNAV discount should narrow to ~10%, similar to peer Capitaland, pushing its share price closer to our highest-on-the-street Target Price of S$10.20.

Valuations

• Our Target Price of S$ 10.20 is based on sum-of-parts valuation:
  1. O&M segment is valued at 2.4x P/B,
  2. infrastructure at 15x PE on FY18F earnings,
  3. property segment at 1.35x P/BV,
  4. investment (Keppel Capital) at 15x FY18F earnings, and
  5. market values/estimated fair values are used for listed subsidiaries.
• Our Target Price translates to 1.3x FY18 P/B.

Key Risks to Our View: 

• O&M segment could fare worse than expected. We forecast annual revenues from Keppel O&M to fall to the ~S$2-4bn level in FY18-19, from S$7-8bn during FY12-14. If contract flows do not come through as expected, continued depletion of its orderbook could pose downside risks to our forecast.

WHAT’S NEW - A kitchen sinking 2017

• One-off financial penalty totalled S$619m, consists of S$570m financial penalty as announced, plus an additional S$49m of related legal, accounting and forensics costs. Excluding these one-off items, Keppel would have achieved a net profit of S$836m. This represents 7% increase y-o-y, underpinned by growth from property, infrastructure and investment divisions. Taking into account the penalty, Keppel’s PATMI plunged 72% y-o-y to S$217m.
• Declared 14 Scts final dividend, bringing FY17 total dividend to 22 Scts. As promised, Keppel ring-fenced the one-off financial penalty when considering the dividend payout, which is in line with their guidance of 40-50%.

O&M in the red but outlook improving. 

• 4Q17 reported net loss of S$218m excluding the one-off penalty, largely due to additional S$81m provisions for losses made on the Sete Brasil projects and S$54m in impairment on other assets. 
• In addition, there was a forex loss of S$50m during the quarter. These were partially offset by S$178m revaluation gain on investment properties.

Do not foresee major operational impact from bribery incident. 

• Keppel has reassured investors that the global resolution brings an end to their bribery case in Brazil, and Keppel has put place enhanced compliance framework to prevent the recurrence of such incidents. 
• Keppel has been actively engaging with customers on the situation and is confident that this would not affect their relationships with customers and future project tendering.

Net orderbook stood at S$3.9bn

• Net orderbook stood at S$3.9bn (excluding S$4bn for Sete projects), unchanged from last quarter. New orders in 2017 amounted to S$1.2bn, more than doubled of 2016’s S$500m. The projects won include LNG fuel containerships, FPSO jobs, and dredgers. 
• We expect ordering activities for production/LNG facilities to pick up this year, potentially driving the increase in order wins to S$3bn.

Golar extending notice to proceed in mid- and end-2018. 

• The notice to proceed for second (Gandria) and third (Gimi) unit of FLNG conversions for Golar have been extended. The Final Investment Decision (FID) for Gandria is expected in 2018 and Golar has provided funds to kick start some early work in the conversion of Gandria.

Time is not ripe for acquisitions. 

• In response to questions on a merger, management has reiterated their stance that Keppel is comfortable with its current O&M capacity after a massive right-sizing exercise. It does not make sense to acquire more capacity at this juncture.

Property marked recorded another stellar year; low landbank cost. 

• Property Division posted a net profit of S$685m in 2017, up 10% y-o-y. Home sales totaled 5,480 units, of which 3,725 homes were sold in China, 1,110 in Vietnam, 380 in Singapore, and 270 in Indonesia. 
• Overall sale volume was marginally lower than 2016 by 4%, due to tightening measures in China and timing of launches in Vietnam. Of the 63,000 homes in the pipeline, about 16,7800 homes are ready for launch from now till 2020, representing 3.1x of 2017 home sales.

ROE target remains. 

• Keppel Land achieved an average ROE of 9.4% over the past five years and management remains committed to achieve through cycle ROE of 12%.

Creaming on low cost landbank. 

• 70% of Keppel Land’s residential land bank was acquired more than seven years ago at relatively lower cost, realising RNAV when development is completed.

Infrastructure delivered 33% growth to S$132m profit in FY17. 

• The strong performance was driven by energy infrastructure business as well as growing operations and maintenance of the assets. We expect steady performance from infrastructure going forward.

Investment recorded a strong net profit of S$235m

• Investment recorded a strong net profit of S$235m, underscoring stronger contributions from Keppel Capital and Investment in Tianjin Eco-city, which contributed S$120m in FY17 (vs S$34m in 2016).

Tianjin Eco-City land sales expected. 

• While sales might be lumpy from quarter to quarter, management expects Tianjin Eco-City land sale to contribute steadily on a yearly basis.

Pei Hwa HO DBS Vickers | http://www.dbsvickers.com/ 2018-01-26

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 10.20 Down 10.300