Keppel Corporation - CGS-CIMB Research 2019-04-18: Upsizing O&M!


Keppel Corporation - Upsizing O&M!

  • We are excited that KEPPEL CORPORATION LIMITED (SGX:BN4) plans to hire 1,800 full-time staff over the course of 2019 in anticipation of the recovery of the O&M business.
  • With this, we think investors could look past the slight miss in 1Q19 net profit of S$203m vs. our S$230m and consensus of c.S$250m.
  • Maintain ADD and target price of S$8.41 on SOP valuations. See attached PDF report for valuation details. 
  • Stronger-than-expected order wins in O&M and resolution of Sete Brasil rigs are catalysts.

O&M plans to hire 1,800 staff in 2019

  • The plan to hire is in view of an increase in workload from new projects. Keppel O&M secured S$1bn of orders YTD with order book increased 9% y-o-y to S$4.7bn. The hiring is also to prepare for a recovery in the O&M sector, which we believe will take place meaningfully in 2020. We forecast S$2.5bn of order wins in 2019.
  • Since late 2014, O&M has been rightsizing the staff strength of close to 18,000 workers from the peak of 30,000 workers. Currently, the division has a staff strength of 10,843.
  • O&M net profit for 1Q19 was S$6m, in line with our expected S$5m. However, EBIT margin of 1% was below our 4% due to the project mix, including the recognition of lower margin Borr Drilling rigs. Net profit was lifted by continued firm charter in Floatel.

Property: positive in China, Singapore to develop plot 4 Keppel Bay

  • Property net profit of S$132m was in line with our S$135m with Dong Nai's divestment gain of S$50m recognised. The number of units sold in 1Q19 grew 30% y-o-y to 390 units. China’s sales were up 21% y-o-y to 230 on the back of favourable sentiment.
  • Keppel Corp is also looking at developing Keppel Bay Plot 4 (39% stake) with GFA of 344,448 sf (429 units). Management calculated the RNAV of Keppel Land to be S$10.3bn or c.S$5.68 per share. This excludes SSTEC at S$1.2bn (S$0.66/share).

Investment: stronger Keppel Capital, infrastructure repositions logistics

  • Investment net profit of S$49m was below our S$64m due to impairment of KRISENERGY LTD (SGX:SK3) (S$19m), offset by higher profit from Keppel Capital (KC) of S$23m (vs. our S$14m expectations), thanks to fees from Ixom in KEPPEL INFRA TRUST (SGX:A7RU).
  • Infrastructure profit of S$16m was lower than our S$28m which included S$7m share of cost of acquisition of Ixom by Keppel Infra Trust as well as higher staff costs in the logistics business as part of the groups’ repositioning of KEPPEL TELE & TRAN (SGX:K11).

O&M target hiked to 15% from historical 10-12%

  • Keppel Corp showcased its ‘realistic’ ROE targets for the group of 15%. This is split into 15% for O&M which is a step-up from its long-term target of 10-12%. We believe this can be achieved via an asset-light strategy and upward capital distribution.
  • No change in the 12% target for Keppel Land. Other ROE set include M1 LIMITED (SGX:B2F): 25%, infrastructure: 15% data centres: 18%, logistics: 12%, Keppel Capital: 20% and Urban Solutions:15%.

The stock is trading below 10-year average

  • Keppel Corp is trading at undemanding valuations of 11x FY19F, below its 10-year average of 12x as well as 0.9x FY19 P/BV or below -1s.d (1.1x).
  • Key catalysts include
    1. positive developments in O&M,
    2. stronger sentiment in property and
    3. gradual ROE expansion.
  • Execution hiccup as a bigger conglomerate could be a key risk.

LIM Siew Khee CGS-CIMB Research | 2019-04-18
SGX Stock Analyst Report ADD MAINTAIN ADD 8.410 SAME 8.410