Keppel Corporation - CIMB Research 2018-04-19: Gainful Quarter

Keppel Corporation - CIMB Research 2018-04-19: Gainful Quarter KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Gainful Quarter

  • Keppel Corp 1Q18 net profit of S$337.4m (+29% y-o-y) formed 33% of our and consensus FY18F with the recognition of enbloc gain (S$289m) from Keppel China Marina.
  • Given the lumpiness of property divestment gain, we deem the results to be a slight miss because of reported losses in O&M (-S$23m) and investment (-S$43m).
  • On a positive note, efficiency gains have kicked in for O&M as EBIT margin swung positively to 2.4%. We keep our 7% EBIT target for FY18 as we expect a better 2H18.
  • With no major land sale in Tianjin Eco City, the investment division was further dragged by mark-to-market losses and delayed 4Q17 losses in Kris Energy.
  • Maintain ADD and unchanged Target Price of S$10.00 (SOP valuations). We see catalysts from 
    1. O&M recovery,
    2. redevelopment of property projects and
    3. higher dividend.

Hope to redevelop Keppel Towers by early 2019 

  • As expected, property profit of S$378m (+32% q-o-q, +268% y-o-y) was lifted by enbloc gain from Keppel China Marina. Core net profit of c.S$87m (+20% y-o-y) was fueled by positive market sentiment in Singapore - Highline Residences were fully sold in 1Q18 (50 units).
  • China home sales were dampened by cooling measures with only 190 units sold (-74% y-o-y and -86% q-o-q). There will be 2,400 homes ready to launch in China in FY18. Keppel Corp targets to redevelop Nassim Woods by end-18 and Keppel Towers by early 2019.

Leaner yard gradually improves EBIT margin, hope for better 2H18 

  • O&M turned in a loss of S$23m as revenue dipped 30% y-o-y and q-o-q to a low of S$332m.
  • The division is also affected by a higher tax rate from deferred tax adjustment for Keppel US due to tax reform. EBIT margin improved y-o-y and q-o-q to 2.4% as we believe the closure of sub-optimal operations has helped. 
  • We expect better margins to catch up in 2H18 as more material progress is made on the Gandria FLNG conversion. Awilco semisub (US$425m) will also start to see recognition by end-2018.

Building up order book and other O&M updates 

  • Order book stood at S$4.3bn vs. S$3.9bn at end-FY17. S$580m orders were secured YTD, forming 19% of our S$3bn FY18 expectation. 
  • Can-Do drillship built on a speculative basis is at the final testing stage, ready to market in 4Q18 with the option of outright sale or “other options”. We also gather from management’s tone that any hope to restart the two semi-subs for Sete Brasil may still take time to finalise. Refer to our report “Keppel Corp - Hope to restart work for Petrobras but may take time” dated 2 Mar 18.

Investment multiple drags 

  • Investment recorded wider-than-expected net loss of S$43m, dragged by
    1. fair value loss on the Kris Energy warrants,
    2. lower investment income from Keppel Capital (marked to market of K-REIT’s lower share price,
    3. absence of land sale in Tianjin Eco City (TEC) and
    4. delayed 4Q17 loss recognition for Kris Energy
  • Management is still hopeful to see meaningful contribution from Tianjin Eco City for the year.

At current share price, risk-reward is attractive 

  • Balance sheet is strong with net gearing at 0.42x (end-FY17: 0.46x). Pegging Keppel Land’s valuation to Singapore developers’ 30% discount to RNAV would imply a S$1.37bn equity value to Keppel O&M or 0.8x CY18F P/BV, a steep discount to Sembcorp Marine’s 1.8x. 
  • We think recovery of O&M has not been priced in. A steadier oil price should see increasing confidence and sustained recovery. 
  • We prefer Keppel Corp over Sembcorp Marine for its valuations and stronger balance sheet. 
  • Downside risks are weaker orders and zero land sale from Tianjin Eco City (TEC).

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-04-19
SGX Stock Analyst Report ADD Maintain ADD 10.000 Same 10.000