Keppel Corporation - OCBC Investment 2019-04-22: Mid-Long Term ROE Target Of 15%

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KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - Mid-Long Term ROE Target Of 15%

• Keppel Corp's 1Q19 results in line.
• O&M workforce to expand.
• Net gearing higher at 0.72x.

1Q19 results in line with expectations

• KEPPEL CORPORATION LIMITED (SGX:BN4) saw a 4.1% y-o-y increase in revenue to S$1.5b but registered a 39.9% drop in net profit to S$202.9m in 1Q19, such that the latter accounted for 24% and 21% of ours and the street’s full year forecasts, respectively.
• Net profit from the Property division decreased by 65% to S$132m in 1Q19 with the
  1. absence of gain from the en-bloc sale of Keppel Cove at Zhongshan and
  2. lower contribution from Singapore property trading.
• Net profit from Infrastructure fell 38% to S$16m with lower contribution from Energy Infrastructure, the logistics business and share of losses from Keppel Infrastructure Trust (SGX:A7RU).
• As for Investments, it turned in net profit of S$59m in 1Q19. Arising from gaining majority control in M1 (SGX:B2F), the group recognised a fair value gain. There was also higher contribution from asset management and lower share of loss in KrisEnergy (SGX:SK3).

May add to O&M workforce this year

• Revenue from the offshore & marine division was at the same level as 1Q18, but the segment turned in net profit of S$5.9m compared to losses of S$109.3m and S$22.8m in 4Q18 and 1Q18.
• Since late 2014, Keppel Corp has been right-sizing the segment, but looking ahead, there are plans to recruit about 1,800 full-time staff in 2019, the first time in a number of years. As a comparison, O&M’s direct headcount as at end Mar was about 10,800.

Higher net gearing at 0.72x

• Meanwhile, the O&M division’s net order book, excluding the Sete rigs, stands at S$4.6b. Net gearing increased to 0.72x as at end Mar 2019, compared to 0.48x as at end FY18 due to higher working capital requirements, financing for the acquisition of M1, and as a result of the inclusion of lease liabilities due to the adoption of the new accounting standard on leases.
• Looking ahead, Keppel Corp has announced a mid to long term ROE target of 15%; its average ROE from 2009- 2018 was 17.7%.
• We tweak our estimates and update the market values of the group’s listed entities, and our fair value estimate is raised to S$7.83.

Low Pei Han CFA OCBC Investment Research | https://www.iocbc.com/ 2019-04-22

SGX Stock Analyst Report BUY MAINTAIN BUY 7.83 UP 7.550