Keppel Corporation - UOB Kay Hian 2018-05-25: Growing Uncertainty In Property Earnings

Keppel Corporation - UOB Kay Hian 2018-05-25: Growing Uncertainty In Property Earnings KEPPEL CORPORATION LIMITED SGX: BN4

Keppel Corporation - Growing Uncertainty In Property Earnings

  • A review of Keppel Corp’s property business points to earnings softness from the revised launch schedules. Earnings impact in 2018 is muted as Singapore and Indonesia offset the weaker China earnings, but 2019 earnings are visibly weaker.
  • A recent land sale at TJEC saw no bidders and we are concerned about the valuation impact if China’s weakness prolongs.
  • Our property RNAV falls slightly by 3% and our 2018 earnings estimate is lower by 1%. Maintain BUY and target price of S$9.00.


  • China property outlook softening. The revised launch schedules of Keppel Corp (KEP) have resulted in lower earnings for China of 8-14% for 2018-19. Launches have been pushed into 2020, thereby lifting earnings from China by 30%. Earnings in 2018 are no longer driven as much by projects in Wuxi as launch schedules are shifted to Tianjin and Chengdu, which are now the focus cities that will drive Keppel’s property earnings for this year.
  • Weakness in China to be partially offset by Singapore. The launch of Serangoon North in 2H18 will partially offset the earnings weakness in China. Rising property prices (URA property price index rose 3.9% y-o-y in 1Q18) as well as continued strong momentum in home sales should support this. Colliers expects home sales to rise 19% y-o-y in 2018. Our earnings estimate for 2018 rises by 20%, but fall 12-17% in 2019-20 as we bring forward launch schedules.
  • Vietnam property market remains buoyant potential for upside. The revision sees a small change in earnings for Vietnam for 2018 (+2%) and 2019 (+5%). Earnings in 2020 will see a sharp pick-up due to incorporation of the scheduled launch of 926-unit Palm City (South Rach Chiec). The Vietnamese property market remains hot. According to Jones Lang LaSalle (JLL), sales reached 15,586 units (+91.5% y-o-y) in 1Q18, while prices continue to trend higher, rising 1-2% q-o-q. JLL expects the strong sales momentum to continue into, end-18. We expect Keppel Corp to accelerate property launches in Vietnam to offset the weakness in China.
  • Recent land tender at TJEC drew zero bids. At end-Mar 18, a land plot of about 109,700sqm was put up for sale with a minimum/maximum price of Rmb19,795psm and Rmb29,692psm, and drew zero bids at the close of tender in early- May. This concerns us as it suggests that the property cooling measures implemented by the government are having an impact. 
  • Earnings may see downside risk as Keppel Corp, the master planner of Tianjin Eco-City (TJEC), is currently assumed to be able to generate about S$100m in profits annually through land sales.


  • Property earnings may see more downside risk. According to our China property analyst, home sales GFA for sample cities we track dropped 26.6% y-o-y in April, with weakness found in all tiers of cities (tiers 1,2,3,4 down by 23%, 29%, 15% and 60% y-o-y respectively). Moreover, in March and April, home sales GFA sold fell 29% y-o-y. March and April are usually the second highest periods of sales during the year, with September and October being the peak periods. Nevertheless, 2Q18 home sales and property earnings will likely set the tone to the overall trend for Keppel Corp’s property earnings this year.
  • Lack of land sales in TJEC in 2018 could see target price fall by 2%. Assuming Keppel Corp fails to sell any land at TJEC this year, a larger RNAV discount might be warranted, on top of a lower RNAV valuation. At the base case, applying a 40% discount (currently 30%) and factoring in no land sales in 2018, our valuation for TJEC declines to 47 S cents per share (-19%). Our SOTP target price for KEP will fall to S$8.84 (-2%) as a result.
  • Property RNAV at risk of downgrade if slowdown in China becomes prolonged. China currently makes up ~15% of Keppel’s RNAV of S$5.54 per share. Should the slowdown in China home sales become pro-longed, Keppel Corp will likely face hurdles in selling enough units to achieve its ROE targets. We would not be surprised if Keppel accelerates divestment of its non-core holdings in China to boost returns. In any case, continued weak core earnings from property sales will likely prompt a revision to our RNAV, on top of application of a higher discount. 
  • We maintain our 20% RNAV discount although we note that the RNAV discount in China has widened from an average of 36% in Jan 18 to 40% in May 18. Had we applied a blended RNAV discount based on geography, this would have translated to 30%, and our SOTP target price will fall to S$8.27 (-8%).


Trim earnings estimate for 2018 by 1%.

  • Despite the slower launches in Wuxi projects, this was met with higher launches from V-City in Chengdu. Coupled with higher contributions from a bouyant Singapore market, as well as contributions from Indonesia, our 2018 net profit estimate falls to S$807m (-1%).
  • The impact for 2019-20 is higher, largely due to the launch schedule revisions, at S$1,047m (-8%) and S$1,339m (+14%) respectively.


Maintain BUY and target price of S$9.00.

  • Our property RNAV fell from S$5.73/share to S$5.54/share as a result of this exercise, as did our valuation for Keppel’s O&M value due to the lower book value reported in 1Q18. Offsetting this is a reversal to net cash position for the holding company (HoldCo), resulting in our target price declining slightly to S$8.96.
  • We leave our SOTP target price unchanged at S$9.00. Maintain BUY although we recommend picking up on dips closer to S$8.00.
  • Keppel Corp remains our preferred pick to play proxy while valuations for its O&M still remaining a laggard to its peer Sembcorp Marine.

Foo Zhi Wei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-25
SGX Stock Analyst Report BUY Maintain BUY 9.000 Same 9.000