Keppel Corporation - DBS Research 2018-07-09: Limited Impact From New Property Measures

KEPPEL CORPORATION LIMITED SGX: BN4

Keppel Corporation - Limited Impact From New Property Measures

Reiterate BUY; Target Price reduced to S$9.10, as we widened the RNAV discount to 25% (previously 10%). This is in line with peer CapitaLand, reflecting the recent Singapore residential curbs.
The property measures should have limited impact on Keppel, whose Singapore residential exposure forms only < 10% of RNAV.
We continue to favour Keppel as a safer proxy to ride the O&M recovery, given its multi-pronged businesses.
Keppel’s decent dividend yield of 3% (based on 40% payout ratio) also lends support to its share price.

Keppel’s huge historical land bank of ~6.5m sqm is held at a low cost. Half of the land bank is currently under development, progressively realising its RNAV over the next 3-5 years. Out of its remaining undeveloped land bank, 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 has yet to be reflected in our RNAV.
In addition, the ongoing portfolio rebalancing exercise will unlock values of completed projects.

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$840m new contracts. io. New orders are expected to come from gas and FPSO projects buoyed by sustained oil prices above US$70/bbl.
The recovery in new orders towards our assumption could prompt further re-rating of the O&M business.

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.

Property curbs reinstated. On 5 July, the Singapore authorities announced further property curbs by raising Additional Buyer’s Stamp Duty (ABSD) rates by 5ppts and tightening Loan-to-Value (LTV) limits by 5ppts. The aim of these measures is to curb excessive property price increases, which came as a surprise to us. The measures were to be effective from 6 July.

Our property analyst estimates that the combined impact of these measures raises the cost of ownership on an assumed S$1.5m property purchase by S$75,000 (first-time buyer) and S$150,000 (investor). With the increased upfront capital commitment, we expect demand from investors and foreigners to cool in the immediate term. SGinvestors.io.
In terms of sales momentum, we expect total volumes to fall to 9,000-10,000 units in 2018, and potentially even further if these curbs remain.

Keppel’s Singapore residential book has been substantially sold. Its only has two launched residential projects in Singapore - Reflections and Corals at Keppel Bay, with c.20% of units remaining for sale. Keppel hasn’t been actively bidding for land in Singapore. The only addition in recent years to Singapore landbank was the Serangoon North Ave 1 (60% stake) with 463k GFA acquired in mid-2017.
Singapore residential exposure forms only ~9% of RNAV.

Pei Hwa HO DBS Group Research Research | https://www.dbsvickers.com/ 2018-07-09

SGX Stock Analyst Report BUY Maintain BUY 9.10 Down 10.200