Keppel Corporation - CGS-CIMB Research 2018-10-18: O&M Turnaround, Investment Seedling Growth


Keppel Corporation - O&M Turnaround, Investment Seedling Growth

  • Keppel Corp’s 3Q18 net profit of S$226m was below our S$277m forecast but in line with consensus. Investment and property were key misses.
  • O&M is profitable, thanks to interest income, but we think the profitable trend is sustainable with Awilco semi-subs construction to begin in 4Q18.
  • Near-term appetite for the stock could be capped by the group’s final stake in M1 and what it can do to transform the telco. Target Price cut to S$8.28; maintain ADD.

Property needs more completion in 4Q18

  • Property 3Q18 profit was S$161m, with S$122m of gains from the divestment of Aether Bejing. 9M formed 68% of our FY18 forecast. Excluding this, core profit for property was c.S$40m, vs. S$58m in 2Q18.
  • There were few completions in 3Q18 and more are expected in 4Q18, which could lift overall profits. However, this means the property division also needs to see more divestment and revaluation gains in 4Q18.
  • It sold 74 units of The Gardens Residences, c.50% of units launched and no discounts given thus far. Management is still watching the Singapore market although the development of the Nassim project is still a go-ahead.
  • Keppel Towers redevelopment to be delayed with the purported use being tweaked.

O&M turnaround, on track for a slow recovery

  • O&M turned in a profit of S$1.5m in 3Q18 from c.S$40m of losses in 1H18. This was helped by a catch up in interest income recognition from the deferred payment of two customers. As a result, interest income grew by 203% q-o-q to S$32m.
  • The profitability trend is likely to continue as it is on track to begin construction of the Awilco semi-sub in 4Q18. 9M18 operating margin was 1.6%.
  • We now expect FY18 O&M of c.3% and S$5m net profit. YTD order wins are S$1.4bn, on track vs. our S$2bn.

Investment seedling growth, infrastructure lifted by one-off gain

  • Investment’s 3Q18 profit of S$8m was below our S$29m expectation. This is mainly due to lower one-off performance fees and higher expenses for growth in Keppel Capital. Recall that the group has recently ventured into senior living (50% stake in Watermark Retirement), Mindchamps early childhood fund (S$200m) and A$1bn of Australian retail malls with Vicinity.
  • Tianjin Eco City (TEC) sold two plots of land in 3Q18 (79.5k sq m and 219.1 sq m, respectively). Gains for the 79.5k sq m plot were booked in 3Q18 (we estimate c.S$25m) while the second plot will be booked in 4Q18 (we estimate more than S$30m).
  • 3Q18 infrastructure of S$55m (+38% q-o-q, +38% y-o-y) was lifted by S$20m gain from the divestment of a 4.08% stake in KDC REIT and stronger q-o-q associates profit.

Maintain ADD, Target Price cut to S$8.28, stock at 1x P/BV vs. 10% ROE

  • We cut our EPS by c.5-6% for FY18-20F on lower profit from Keppel Capital and Tianjin Eco City. We also lower O&M op. margin to 5% (from 8%) in FY19 on a slower recovery. As a result, our Target Price is reduced, still based on SOP.
  • Key catalysts could come from clarity of final stake and transformation plan on M1’s acquisition, stronger oil price and orders.

LIM Siew Khee CGS-CIMB Research | 2018-10-18
SGX Stock Analyst Report ADD MAINTAIN ADD 8.28 DOWN 8.820