Keppel Corporation - UOB Kay Hian 2018-10-19: 3Q18 Headwinds On All Fronts

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KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - 3Q18: Headwinds On All Fronts

• Keppel Corporation reported 3Q18 core net profit that was significantly below expectations. Of the S$226m headline net profit, S$162m comprised one-off gains.
• O&M returned a profit, helped by a one-off catch-up recognition of interest income. The weakness in Property continued into 3Q18. Investments saw higher expenses from new initiatives dent profitability.
• An earnings recovery seems distant and we slash our 2018 earnings estimate by 38%.
• Maintain HOLD with a lower target price of S$6.79. Entry price: S$6.10.

3Q18 RESULTS

3Q18 core net profit of S$54m, below expectations.

• Keppel Corporation reported 3Q18 headline net profit of S$225.7m (-15% y-o-y), or 21% and 22% of our and consensus headline estimates respectively. One-offs during the quarter included after tax gains of:
  1. S$122m from sale of Beijing Aether,
  2. S$20m from sale of Keppel DC REIT (SGX:AJBU) shares and, and
  3. S$20m revaluation of Keppel REIT (SGX:K71U) shares.
• Excluding these one-offs, core net profit was S$54m (-55% y-o-y, -55% q-o-q), coming in below expectations at our core estimates.

O&M: Net profit, helped by one-off.

• Performance from the Offshore & Marine (O&M) segment remains lacklustre. A net profit of S$1.5m was reported for 3Q18 although this was helped by higher interest income (+S$22m q-o-q).
• The delta was attributed to loans made to two clients, of which an undisclosed quantum comprised a one-off catch-up recognition of interest income. Gandria had its notice to proceed extended from mid-18 to end-18, while Gimi awaits for notice to proceed by end-18.

Property: Core net profit remained subdued.

• Revenue was lower at S$180m, down 67% y-o-y. Results included S$122m after-tax gains from sale of Beijing Aether, which translated to S$39m core net profit (-59% y-o-y, -4% q-o-q). Core operating margin was 20%, in line with historical average of 18%.
• Keppel reported strong home sales of 1,760 units for 3Q18 (+33% y-o-y, +57% q-o-q), driven primarily by China and India.
• Sales in Singapore were muted at 20 units. Nassim Woods remains on track for a launch, while Keppel Tower may see a slight delay in launch.

Infrastructure: Steady performance.

• Excluding the S$20m gains from sale of Keppel DC REIT (SGX:AJBU) shares, core net profit was S$35m (-11% y-o-y, +46% q-o-q). The uptick was driven by progress at the Keppel Marina East Desalination Plant and Hong Kong Integrated Waste Management Facility.
• Keppel also announced it had won a > €70m contract to supply technology solutions for Australia’s first Waste-to-Energy plant.

Investments: Higher expenses dragged bottom line.

• A revaluation gain of S$20m was recognised from Keppel REIT (SGX:K71U). Higher expenses from new initiatives started by Keppel Capital dragged the asset management business, which came in below quarterly expectations of S$16m-17m per quarter.
• Management said fee income remained stable.

Only one land sale from TJEC.

• Ytd, Keppel has sold two residential land plots totalling 16.7ha for Rmb2.3b. Only the land sale of plot 26 was recognised in 3Q18, with plot 31 likely to be recognised in 4Q18.
• We estimate S$45m profit contribution from both deals for 2018.

STOCK IMPACT

Remaining cautious on Property.

• Our concerns about the headwinds facing the property business were not unfounded. Earnings from the key property segment remain weak. Launch dates for some projects in China and Vietnam have been pushed to the right, suggesting market conditions on the ground to be unfavourable in the short term.
• Land sales in TJEC were also lacklustre, with price per GFA coming in below expectations. While Keppel’s property projects remain profitable, earnings are tracking below expectations in the near term.

Earnings recovery remains distant.

• With the key property business seeing a slowdown, and the O&M business still in the doldrums, it is difficult to see an earnings recovery for Keppel. Its various initiatives such as the acquisition/transformation of M1 (SGX:B2F), and expansion into new asset classes for Keppel Capital will likely be capital intensive.
• Dividends could come under pressure as cashflow is re-directed to support future developments.

EARNINGS REVISION/RISK

Slash earnings for 2018 by 38%.

• We slash our core earnings forecast for 2018 by 38% as we cut forecasts for the property business and incorporate divestment gains.
• Our headline earnings for 2018 remain largely unchanged. While our forecasts for 2019-20 are largely unchanged at S$782m (-1%) and S$994m (-1%) respectively, we see risks to the downside.

VALUATION/RECOMMENDATION

Maintain HOLD and cut target price to S$6.79.

• Our target price has been lowered to S$6.79 after:
  1. raising Property RNAV discount to 40% (from 35%), and
  2. lowering PE multiple to 15x (from 19x) for Keppel Capital.
• Given the weaker-than-expected results, Keppel Corp's share price could see a short-term negative reaction.
• Upside risk is a higher-than-expected final dividend as part of Keppel’s 50th Anniversary.
• Keppel’s businesses continue to face headwinds, and until catalysts emerge pointing to a clear recovery we prefer to stay cautious.
• Maintain HOLD. Entry price is S$6.10.

Foo Zhi Wei UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-10-19

SGX Stock Analyst Report HOLD MAINTAIN HOLD 6.79 DOWN 7.370