Keppel Corporation - UOB Kay Hian 2019-07-19: 1H19 In-Line, Outlook Improving

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - 1H19 In-Line, Outlook Improving

KEPPEL CORPORATION LIMITED (SGX:BN4) reported 1H19 net profit of S$356m, declining 39% y-o-y due to the high-base effect of 1H18 which saw significant contributions from en-bloc sales of its property projects.
The highlights came from the infrastructure and property business segments with both facing robust revenue and business outlooks.
An interim dividend of S$0.08 (1H18: S$0.10) was declared.
We have a BUY rating with a target price of S$7.61.

Solid contribution from the infrastructure segment which saw a 17% y-o-y increase in revenue, and this strength is expected to continue due to its power & gas businesses.

Keppel Corp’s operating profit in 1Q19 jumped more than 4.5x q-o-q to S$11.4m, albeit off a low base. While we do not envision a quick recovery in the rig-building sector, we note that as a reflection of management’s growing confidence, its headcount in this business segment rose 7% q-o-q. Ytd, new orders of S$1.9b has already exceeded that of the whole of 2018 which saw S$1.7b in orders.

Property projects remain robust in China which bodes well for the company’s outlook given that this segment contributed nearly 60% of its operating profit in 1H19.
In particular, the company saw strong sales in Nanjing, Wuxi and Tianjin. We highlight that over 2H19 to 2022, the company forecasts S$2.9b in earnings from the sale of its overseas homes.

As at end-Jun 19, the company’s net gearing was 0.82x and management guided for this to increase in the near to medium term due to working capital needs from the O&M segment as well as the property division.

From a loss of S$4625m in 1H19 which was spearheaded by stronger earnings from Keppel Capital as well as higher contributions from M1 post its acquisition in 1Q19.
The profit was slightly offset by higher interest expense and amortisation as a result of the acquisition, the latter impacting the company in the coming quarters, on our estimates.

BUY. We resume coverage of Keppel Corp with a BUY rating and a target price of S$7.61 based on our sum-of-the-parts return of 18.9% vs the current share price level.

Segment	Method	Multiple	S$m	S$/share
Offshore & Marine	DCF		7,111	3.88
Infrastructure	Target P/B	1.2	1,681	0.92
Keppel Corp Property	Target PER	12.0	9,464	5.17
KREIT	UOBKH TP		2,045	1.12
Investments	EBIT multiple	15.0	736	0.40
Add: Net (debt)/cash			(5,560)	(3.04)
SOTP valuation			15,477	8.45
Holding company discount (%)				10.0
Target price				7.61

Current valuations appear undemanding as Keppel Corp is currently trading at a one-year forward PE of 13.9x based on our 2020E forecasts and below with its 5-year average of 14.4x. Importantly, we highlight that the company’s 1-year forward P/B multiple of 1.0x is 1SD below its 10-year historical average of 1.5x.
We note that going into the 1H19 results, consensus earnings were on the high side in our view. We believe that Keppel Corp’s earnings-revision momentum may continue to be negative in the next week or so as forecasts are adjusted down; however we believe that the quality of the company’s earnings has improved over the past two years and it has executed its projects well in all of its business divisions.
Risks to the company achieving our target price include lower-than-expected orderbook wins for its O&M segment, further property-cooling measures in China, and higher interest rates which may curb demand for its property products.

Further strength in new order wins for the O&M segment, particularly for renewable and LNG assets.
Inorganic and earnings accretive acquisitions in the property space in China and Vietnam.

Singapore Research Team UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-07-19

SGX Stock Analyst Report BUY MAINTAIN HOLD 7.61 UP 6.790