Keppel Corporation - UOB Kay Hian 2018-07-20: 2Q18 Core Earnings Below Expectations; Makes Up With Special Dividend

SGinvestors.io

KEPPEL CORPORATION LIMITED SGX:BN4

Keppel Corporation - 2Q18: Core Earnings Below Expectations; Makes Up With Special Dividend

• 2Q18 core earnings was significantly below our expectations.
• O&M appears stabilised at the operating level, but remains a net loss.
• Property appears to be facing headwinds, with core earnings down q-o-q. New land plots will be tendered for TJEC in 2H18, but the transaction price is a key question.
• Earnings have been slashed by 13-33% for 2018-20. Our recommendation and target price are put Under Review, as we re-evaluate our Property RNAV given the weaker property outlook.

RESULTS

Keppel Corporation reported 2Q18 headline net profit of S$246.2m (+54% y-o-y).

• Earnings were once again helped by divestments of S$173.5m, partially offset by forex loss of S$48m. Stripping out the divestments gains and other one-offs, core net profit was ~S$120m (-18% y-o-y, +117% q-o-q). 
• For 1H18, core net profit was S$176m of land sales from Tianjin Eco City (TJEC), as well as lower core profitability from its property division.

O&M: Stabilised at the operating level, bottom-line remains a core loss.

• Revenue of S$607m was recognised 2Q18, which included ~S$310m in revenue from two spec build Borr Drilling rigs part of the US$745m transaction. We understand that the units broke even, so excluding its revenue contributions, Offshore & Marine (O&M) core operating margin was ~2%, comparable to 1Q18’s 2%. A gain on disposal of fixed asset (S$1.6m) was recorded for the quarter. 
• The division reported a net loss owing to continued high net interest expense of ~S$20m.

S$1.2b new orders secured as of end-Jun 18.

• New orders clinched in 2Q18 was S$680m, comprising two new jack-ups for Borr Drilling, two dual-fuel dredgers for Van Oord, a dual-fuel bunker tanker and a LNG bunkering vessel. The FLNG Gandria order is now expected to receive notice of construction by year-end. 
• We had flagged potential project risk for this stemming from Ophir’s difficulty in securing financing.

PROPERTY: Core earnings down q-o-q, revenue run-rate declining.

• Excluding the after-tax gain of overseas home worth about S$2.4b over 3Q18 to 2021. Implied revenue is ~S$171m per quarter, lower than historical quarterly revenue run rate of S$400m-500m. 
• Revenue recognition is lumpy, so we are careful about overly reading into this.

Home sales hit 1,120 units in 2Q18.

• The figures represent a q-o-q improvement from 300 in 1Q18, but a 25% y-o-y decline. Sales were driven by China (610), Indonesia (150) and India (225). Sales in Singapore was flat, while Vietnam saw a q-o-q decline.

INFRASTRUCTURE earnings at S$40m, helped by contributions from Keppel Marina East Desalination Plant (KMEDP).

• The project contributed to the stable recurring income of the unit, and is 50% complete. Contributions from the Hong Kong Integrated Waste Management Facility are expected to kick in next year.

INVESTMENTS: No land sales from TJEC, as expected.

• The absence of land sales resulted in the loss for 2Q18. Management remains confident of closing sales in 2H18. Net profit from the core asset management business was stable. However, the Others (Investments) sub division was impacted by mark-to-market equity losses.

Interim dividend of 15 S cents declared.

• This comprises 10 S cents interim dividend, with 5 S cents special dividend and was higher than expected.

STOCK IMPACT

Earnings for 2H18 could remain soft.

• While management appears more upbeat on orders for the O&M segment, TJEC land sales remains the crux of valuations, and a unsuccessful tender in 2H18 presents downside risks. 
• As it stands, 2H18 could remain soft, raising the risk of consensus downgrading earnings estimates, which currently stands at S$1b.

Property earnings at risk of downgrades on scale-back of launches.

• Launches in core cities were largely unchanged, though we note scale-backs in launches for the key Wuxi projects (9% of property estimates). West Vista at Puri and Stamford City saw significant launch deferrals on what appears to be weak sales.

EARNINGS REVISION/RISK

• Cut 2018-20 earnings by 13-33%. We have reduced our forecasts on:
  1. O&M revised to a loss for 2018,
  2. lower property earnings, and
  3. lower ASP assumption of Rmb8,400 psm for TJEC land sales.
• Our revised core estimates for 2018-20F are S$538m (-33%), S$882m (-13%), S$1,140m (-16%). Our FY19-20 earnings remain admittedly high, largely due to the underlying property earnings assumption, which will be reviewed.

VALUATION/RECOMMENDATION

• Recommendation under review. Our recommendation and target price are under review. This sterms from a need to re-evaluate the property RNAV given it comprises 60% of valuation and the weaker property outlook.

Foo Zhi Wei UOB Kay Hian Research | Andrew Chow CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-07-20

SGX Stock Analyst Report BUY REVIEW BUY 9.000 Same 9.000