Keppel Corporation - DBS Research 2018-04-20: Unlocking Property Value

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KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Unlocking Property Value

• We continue to favour Keppel as a safer proxy to ride on property re-rating and O&M recovery.
• Keppel Corp’s decent dividend yield of 3% (based on 40% payout ratio) also lends support to Keppel Corp's share price. 1Q18 net profit of S$337m (+34% y-o-y) was broadly in line, bolstered by property disposal gains of S$289m.
• Reiterate BUY with Target Price of S$ 10.20. 

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 over 6m sqm held at a low cost. Half of the landbank is currently under development, progressively 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.

O&M on the cusp of recovery. 

• O&M’s contract wins in 2017 bucked the declining trend as the division clinched S$1.2bn worth of new orders, which doubled over 2016. The momentum should continue into 2018 with S$3bn new orders assumed. 
• YTD, Keppel has won ~S$500m new contracts. New orders are expected to come from gas and FPSO projects buoyed by sustained oil prices above US$60/bbl. The recovery in new orders towards our assumption could prompt further re-rating of the O&M business.

Valuation

• 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 implies 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 - 1Q18 lifted by property disposal gains 

1Q18 broadly in line. 

• Keppel’s core net profit grew 34% y-o-y and 175% q-o-q to S$337m in 1Q18, boosted by S$289m gain from divestment of Keppel China Marina.

Property contributed ~94% of profit. 

• Property segment generated S$377.8m profit (+268% y-o-y; +32% q-o-q) in 1Q18, boosted by S$289m disposal gain for Keppel China Marina. 
• Keppel sold 300 homes this quarter, as compared to 980 units a year ago, of which 64% was sold in China, 16% Vietnam and 20% Singapore. Of the 61,000 homes in the pipeline, about 16,000 homes are ready for launch from now till 2020, representing 2.9x of 2017 home sales.

O&M losses narrowed; realising cost savings from rightsizing.

• Although revenue fell 32% q-o-q to S$332m in 1Q18, Keppel managed to make a slight operating profit, thanks to cost savings from the rightsizing exercise. As a result, net loss narrowed to S$22.8m, from ~S$100m loss (excluding oneoffs) a quarter ago. 
• Net orderbook inched up slightly to S$4.3bn following the award of S$580m new contracts in 1Q18. Keppel’s first “Can Do” drillship is scheduled to complete by 4Q18 and it is actively engaging with potential customers. In Brazil, while Sete Brasil seems to have reached an agreement with Petrobras on rig charters, there has yet to be confirmation with yards on rig deliveries.

Investment dragged by share of loss from KrisEnergy and absence of Tianjin Eco-city land sale. 

• Investment segment reported a net loss of S$43.8m, which was largely due to share of loss from KrisEnergy, which we estimate to be ~S$47m. The 40%-owned Kris Energy reported net loss of approx. US$90m, hit by ~US$70m asset impairment, in 4Q17 (one quarter lag in recognition). 
• In addition, there were no Tianjin Eco-city land sales concluded in 1Q18, which tend to be lumpy from quarter to quarter.

Infrastructure relatively stable. 

• Infrastructure division posted a net profit of S$26.2m. This represents 19% y-o-y decline due to absence of gains from divestment of GE Keppel Energy in 1Q17. Excluding the gains, earnings rose 30% y-o-y, attributable to higher income from environmental infrastructure and infrastructure services.

Maintain our forecasts. 

• We expect Tianjin Eco-city land sales to gain momentum, and losses from KrisEnergy to narrow on the back of improving oil prices and absence of major asset impairment.

Pei Hwa HO DBS Vickers | http://www.dbsvickers.com/ 2018-04-20

SGX Stock Analyst Report BUY Maintain BUY 10.200 Same 10.200