Keppel Corporation - CGS-CIMB Research 2018-07-10: Hopeful For A Special Dividend

KEPPEL CORPORATION LIMITED SGX:BN4

Keppel Corporation - Hopeful For A Special Dividend

Backed by a stronger balance sheet, Keppel Corp could announce a special dividend of S$0.10-12 in its upcoming 1H18F results to commemorate its 50th anniversary.
Secured c.S$800m of orders YTD. We cut our order assumptions to S$2bn for 2018F (previously S$3bn) to be more realistic in our expectations.
Our EPS is tweaked by 1-2% for FY18-20F on slower offshore & marine (O&M) orders and property sales in Singapore.
Our Target Price dips to S$8.82 still on SOP valuations.

Keppel O&M secured c.S$800m of orders YTD, or 27% of our previous expectation of S$3bn for 2018F. To be more realistic, we now expect the division to clinch S$2bn of orders, still dominated by non-drilling orders. This report is first shared at SGinvestors.io.
Operating leverage could be on the mend with most of the restructuring/closure of sub-optimal yards completed.
EBIT margins likely to remain in the region of 2-3% in the next two quarters as work for Awilco semi-subs (clinched early-2018) will only begin by end-2018F.
Balance sheet, however, should be boosted US$460m (c.S$620m) by payments from Borr Drilling -- US$288m down payment for the recent sale of five jack-up rigs, and US$176m 80% delivery payment for the second of five KFELS Super B Class rigs delivered in Jun 2018.

Singapore residential projects account for c.7% of its property RNAV and c.30% of FY17 property profit. We now assume slower sales pace for Reflections, Corals and Gardens Residence following the recent cooling measures in Singapore's property market. We also apply a 35% (previously 20%) discount to its property RNAV in line with our downgrade of major Singapore developers’ valuations. As a result, our RNAV of Keppel Corp's property unit now stands at S$3.80 (from S$4.70).
We believe the plan to redevelop Nassim Woods (residential) could be put on hold but Keppel Towers (office) could still likely go ahead as the office sub-sector could still see positive dynamics in rental recovery in addition to supply squeeze in new Grade A space in the CBD. This report is first shared at SGinvestors.io.

We expect Keppel Corp to deliver 2Q18F profit of S$190m (-44% q-o-q, +19% y-o-y). Property divestment gains likely to shrink q-o-q from S$290m in 1Q18 to S$90m from the divestments of stakes in projects in Shenyang and Vietnam.
There were no sale in Tianjin Eco City in 2Q18 but investments should swing into profitability from
1. mark-to-market gains (+19% q-o-q) for KrisEnegy warrants, and
2. narrowing losses for KrisEnergy q-o-q.
We expect net gearing to improve to c.0.38x from 0.42x in 1Q18 with the Borr Drilling receipts. This could provide ammunition for special dividend (c.S$0.10-0.12) to reward long-term shareholders.

Our EPS is tweaked by -1-2% for FY18-20F to reflect lower profits from its property and O&M units. Our Target Price is cut to S$8.82 (previously S$10.00), still based on SOP valuations.
Potential re-rating catalysts could come from stronger-than-expected gains from its asset recycling plans, stronger-than-expected recovery in Keppel O&M margins and orders, and special dividends. This report is first shared at SGinvestors.io.
Downside risks could include prolonged weakness in Singapore's property market.

Lim Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-10

SGX Stock Analyst Report ADD Maintain ADD 8.82 Down 10.000