Keppel Corporation - CGS-CIMB Research 2018-07-20: It Gets Better At 50

Keppel Corporation - CGS-CIMB Research 2018-07-20: It Gets Better At 50 KEPPEL CORPORATION LIMITED SGX:BN4

Keppel Corporation - It Gets Better At 50

  • Our hopes of a special dividend materialised with a DPS of S$0.15 (interim: S$0.10, special: S$0.05), payable on 7 Aug 18. We up FY18F DPS to $0.32 (c.4.6% yield).
  • 2Q18 profit of S$246m exceeded our S$190m forecast, thanks to revaluation gain from Nassim Woods and narrower O&M losses.
  • 1H18 profit (S$584m) was 55% of our and 58% of consensus FY18F. Adding the Beijing Aether divestment gain, profit would reach c.S$698m, or 70% of our FY18F.
  • Keppel Corp is able to weather property cooling measures with the vast portfolio of assets with options to defer development of cheap landbank or expedite asset turn.
  • Active asset recycling and gradual recovery in O&M could sustain earnings growth beyond FY18F. We think 1x CY18F P/BV (-1 s.d. of LT mean) is undemanding.

Property, O&M and investment surprised us on the upside

  • Keppel Corp’s 2Q18 net profit of S$246m was above our S$190m forecast mainly due to
    1. property’s S$40m revaluation gain from the designating of Nassim Woods for redevelopment,
    2. O&M’s share of associates swung into S$7m profit (1Q18: loss of S$2m) and
    3. investment’s S$16m dilution gain from Keppel DC REIT’s share placement.

S$1.2bn O&M order win, EBIT profitable

  • O&M secured S$680m of orders in 2Q18, bringing YTD order wins to S$1.2bn. This includes two new speculative built jack-up for Borr Drilling as part of the five-rig deal worth US$745m. 
  • 2Q18 revenue rose 1% (1Q18: 2.4%). We expect margin to pick up in 4Q18 with the initial milestone recognition of Awilco semisubmersible (contracted at US$425m) and Pasha vessels (contracted at US$400m).

Weathering cooling measures with many options

  • Although Nassim Woods has been designated for redevelopment, Keppel Corp is not in a rush to push through given the recent cooling measures in Singapore. We believe Keppel Corp’s hold-sell analysis strategy across regional property portfolio could help to weather the impact of cooling measures. Case in point is the divestment of Beijing Aether investment property (to be completed in 2019) pocketing S$114m upfront gain (the option has been exercised and will be completed by end-July 18). 
  • Going ahead, we gather that there could be more reinvestments into new areas such as Hebei, Guangzhou and Shenzhen.

Hope of land sale in Tianjin Eco City in 2H18

  • There were no land sales in Sino-Singapore Tianjin Eco-city (SSTEC) in 1H18 as prices listed were too high (above 2017 level of 13,800psm) which resulted in no bids. However, management guided that the shortage of homes in the area could still drive some demand. 
  • The group is confident of land sales in 2H18 at 2017 price levels.

Expect a year of two good halves

  • Our hopes of an anniversary dividend materialised due to divestment gains of c.S$416m YTD. Also, balance sheet was stronger with net gearing at 0.4x at end-2Q18 vs. 0.42 in 1Q18. 
  • We think 2H18 earnings could be equally strong on the back of
    1. divestment gains (at least S$114m from Beijing Aether),
    2. stronger O&M,
    3. land sales in Sino-Singapore Tianjin Eco-city (SSTEC), and
    4. more property launches in 2H18 which could lead to stronger property trading.

Up FY18 EPS and DPS; maintain ADD and Target Price of S$8.82

  • We raise our FY18F EPS by 12% to account for the strong 2Q18. We now expect DPS of S$0.32 (49% payout), translating to 4.6% yield. 
  • Key catalysts are stronger divestment gains, O&M orders and resolution of two Sete semis. Unfavourable outcome from EIG litigation is key risk.

Lim Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-20
SGX Stock Analyst Report ADD Maintain ADD 8.820 Same 8.820