Keppel Corporation - UOB Kay Hian 2018-04-20: 1Q18 Below Expectations; China Property Earnings Facing Downside Risk

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KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - 1Q18 Below Expectations; China Property Earnings Facing Downside Risk

• Keppel reported 1Q18 net profit of S$337.5m, boosted by net gains of S$289m from the divestment of Zhongshan. Excluding this and one-offs, core net profit was S$55m, forming 7%/6% of UOBKH/consensus estimates respectively, below expectations. 
• A 74% y-o-y decline in China home sales as well as reduced launches in 2018 see our property earnings estimates having downside risk. 
• Our earnings forecasts are under review. 
• Maintain BUY with a lower target price of S$9.00.

RESULTS

1Q18 net profit of S$337.5m, below expectations. 

• Keppel Corporation (KEP) reported 1Q18 net profit of S$337.5m (+30% y-o-y), largely boosted by pre-tax divestment gains of S$336.9m from completion of sale of Keppel China Marina Holdings (Zhongshan divestment). Excluding this and other one-offs, core net profit was S$55m (-47% y-o-y, - 51% q-o-q), representing 7%/6% of UOBKH/consensus estimates respectively, below expectations. 
• The weaker earnings were largely due to losses at the O&M division, as well as absence of profits from land sales at Tianjin Eco City (TJEC).

O&M: Core operating loss, further exacerbated by associate losses. 

• The O&M division reported operating profit of S$8.1m (+116% y-o-y) on lower revenue of S$332m (- 31% y-o-y, -32% q-o-q). The lower revenue was attributed to lower work volume and project delays. Excluding inventory write-back of S$12.7m, core operating profit was a loss of S$4.6m, an improvement from the 4Q17 core operating loss of S$60m. 
• Projects delivered this quarter included one jack-up and a gas carrier refurbishment. Net orderbook was S$4.3b in 1Q18 vs S$3.9b in 4Q17, reflecting the addition of the semisubmersible order (S$558m) from Awilco.

Home sales hit by cooling measures in China. 

• Home sales for 1Q18 were 300 units (1Q17: 980, 4Q17: 1,695), comprising 190 in China, 50 in Vietnam and 60 in Singapore.
• Sales were hardest hit in China, which declined 74% y-o-y as cooling measures impacted demand. KEP noted that demand remains strong in certain cities with low inventories.

Property launches scaled back. 

• Home launch schedules have been revised, and we note an acceleration of launches in Chengdu and a scale-back in Wuxi. Tianjin’s launch schedule was largely unchanged vs 4Q17.
• Launches in Vietnam and India have been slightly scaled back, while those in Indonesia and Thailand were accelerated. 
• In Singapore, the Serangoon site is expected to be launched this year. An investment decision will be made for Nassim Woods and Keppel Towers later this year.

Core property earnings stable at S$94.5m.

• Operating profit for the division was S$443.8m. Excluding divestment gains from Zhongshan, core operating profit was S$94.5m, reflecting an operating margin of 17.4% (4Q17: 16.9%).

Infrastructure and investments. 

• The infrastructure division reported net profit of S$26.2m, helped by higher contributions from Environmental Infrastructure and Infrastructure Services. 
• Investments reported a net loss of S$43.4m due to losses in associate KrisEnergy and fair value loss on the KrisEnergy warrants. 
• No land sales for TJEC were reported in 1Q18, apparently also impacted by the cooling measures in China.

STOCK IMPACT

Wuxi launch pull-back suggests 2018 earnings might be lower. 

• Keppel’s property earnings in 2018 will mainly be driven by China. 
• For China, home sales in Wuxi and Tianjin respectively make up 38% and 34% of our 2018 earnings estimate for China. While Chengdu will see high home sales, net profit contribution is lower owing to the 35% stake. With launches in the key Wuxi city scaled back, this will likely negatively impact earnings for 2018.

O&M earnings recovery to take time. 

• Revenue from the O&M division in 1Q18 appears to have a higher contribution from repair work vs contract construction work. While oil prices have recovered to over US$70/bbl, we re-iterate that projects continue to be sanctioned at US$40/bbl breakeven, which entails low contract margins. Even if more orders are secured, earnings are expected to be lacklustre in the near to medium term.
• On a happier note, we note that revamps within the O&M division are “pretty much done”.

EARNINGS REVISION/RISK

• No change to earnings estimates. Given the various launch changes, we will review our earnings estimates for the property division and update separately.

VALUATION/RECOMMENDATION

Maintain BUY and trim target price to S$9.00. 

• Our target price falls slightly to S$9.00 after updating for lower target prices of Keppel T&T and Keppel Infrastructure Trust.
• Valuations for the other units remain the same:
  1. 1.3x 2019F P/B for O&M,
  2. 1.0x 2019F P/B for Keppel Infrastructure,
  3. RNAV of S$5.73/share for property (under review),
  4. S$0.60/share for TJEC,
  5. 19x 2019F for Keppel Capital, and 
  6. the rest at market value.
• Keppel remains our preferred pick to play the recovery in the offshore sector, being a cleaner proxy supported by multiple engines of growth over what is likely to be a prolonged earnings recovery.

Foo Zhi Wei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-04-20

SGX Stock Analyst Report BUY Maintain BUY 9.00 Down 9.100