Keppel Corporation - DBS Research 2019-07-19: A Better Second Half

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KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - A Better Second Half

• Keppel Corp's 2Q19 net profit fell 38% y-o-y in the absence of en-block sales, which tend to be lumpy.
• O&M in the black; orderbook rose to S$5.5bn on theback of c.S$1.9bn YTD wins.
• Lowered interim dividend to 8 Scts per share.
• Maintain BUY; Target Price cut to S$8.50 on slow O&G recovery.

Maintain BUY; Target Price cut to S$8.50

• Maintain BUY; Target Price cut to S$8.50, after lowering our O&M P/BV multiple from 2.1x to 1.8x, in view of the slow O&G recovery.
• KEPPEL CORPORATION LIMITED (SGX:BN4)'s 1H19 profit fell 39% y-o-y due largely to lower en-bloc sales, which tend to be lumpy. Interim dividend cut from 10cts to 8cts, in line with ~40% payout ratio. Keppel is well positioned to benefit from the improving property market in China and global O&M recovery.

Where we differ: Positive on Tianjin Eco-city.

• Keppel Corp’s huge land bank of ~5m sqm is held at low cost. Half of the land bank is under development, progressively unlocking its RNAV over the next 3-5 years. Of its remaining undeveloped land bank, 30% is for projects in Tianjin Eco-city. The land was acquired in 2009 at less than one-tenth of the current land price and yet to be reflected in our RNAV. In addition, the ongoing portfolio rebalancing exercise will unlock values of completed projects.

O&M on the cusp of recovery, albeit gradually.

• YTD, Keppel has won ~S$1.9bn new contracts, surpassing S$1.7bn secured in the whole of 2018. While the uptick in ordering for gas related and FPSO solutions was slower than expected, the pace should gather momentum, buoyed by sustainable oil prices above US$60/bbl and rising offshore capex.

Valuation:

• Our Target Price of S$8.50 is based on sum-of-parts valuation:
  1. 0% discount to RNAV or approx. 1xP/BV,
  2. Tianjin WACC
  3. O&M segment is valued,
  4. infrastructure earnings, and
  5. investment earnings.
• Our S$8.50 Target Price implies 13x FY19 P/BV.

WHAT’S NEW - Slower en-bloc sales in 1H19

• Keppel's 2Q19 net profit declined 38% y-o-y to S$153m, due largely to the absence of major en-bloc sales (vs gains of ~S$140m in 2Q18), which tend to be lumpy. This brings 1H19 profit to S$356m (-39% y-o-y), making up ~40% of ours and consensus’ expectations

O&M remains in the black.

• O&M segment reported sequential decline in net profit to ~S$4m in 2Q19, lower than ~S$6m a quarter ago despite higher revenue (S$481m in 2Q19 vs S$332m in 1Q19), probably due to different project mix. The second FLNG conversion project, Golar Gimi, struck steel in 2Q19. This should drive ~15% growth in revenue in FY19/20.
• Net orderbook on an uptrend to S$5.5bn, from S$4.7bn in 1Q19 and S$4.3bn in 4Q18, thanks to securing a repeat mid-water harsh environment semisubmersible drilling rig contract worth about US$425m (approx. S$578m) following the exercise of Awilco’s first of three options in 1Q19, Gimi’s enhanced workscope (S$329m), EPCIC of converter stations (S$560m), EPCIC of offshore windfarm substations (S$150m), and FPSO and Semis upgrade works (S$160m). YTD wins totaled S$1.9bn, surpassing the S$1.7bn secured during the whole of 2018

Optimistic on offshore activities; adding workforce.

• Management is starting to see increase in workflow and looking to add workforce in preparation for the upturn. The increase in staff strength is the first since undertaking its rightsizing exercise in 2014. The group added 1100 staff in 2Q19 and expects another ~700 in 2H19. We see this as a positive indicator of rising offshore activities and contract flow.

Property accounted for 85% of 2Q19 profit.

• Property division posted a net profit of S$130m in 2Q19, down 42% y-o-y.
• 1H19 Waterfront City (Vietnam) in 1Q19. This is much lower than the gains of ~S$440 in 1H18 from the sale of Keppel Cove (c.S$300m), Keppel Township Development Shenyang, and Keppel Bay Property Development (Shenyang).
• Keppel adopted mid-year revaluation of investment properties, resulting in S$38m gains this quarter.

Stronger home sales.

• Keppel sold ~2,100,690 overseas units worth ~S$2.9bn to be recognised from 2H19-2022. Of the 46,000 homes in the pipeline, about 15,000 homes are ready for launch from now till 2021, representing 3.5x of 2018 home sales. Notwithstanding the cooling measures in China, Keppel continues to see strong demand from well-located projects in high growth cities.
• Keppel has commercial portfolio of about 1.6m sm of GFA, of which 50% is under development. When fully developed and stabilised, the portfolio could generate annual net operating income of ~S$300m.

Infrastructure net profit in 2Q19 nearly tripled q-o-q to S$43m

• Infrastructure net a quarter we saw in 2018.

Investment profit more than doubled to S$25m in 1H19

• Investment profit more than doubled to S$25m in 1H19, thanks to re-measurement gains of previously held interest in M1, higher contribution from M1, and higher income from Keppel Capital.
• There were no improving property sentiment in China.

Net gearing rose to 0.82x as of end Jun-2019, from 0.48x as of end 2018.

• This is because of higher working capital requirements and financing for the acquisition of M1 as well as inclusion of lease liabilities due to the adoption of the new accounting standard on leases. Management intends to keep the ratio < 1.
• Keppel declared interim dividend of 8 Scts per share, lower than 10 Scts last year, in tandem with its profit decline. This represents ~40% payout ratio, in line with management guidance.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2019-07-19

SGX Stock Analyst Report BUY MAINTAIN BUY 8.50 DOWN 9.000