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

KEPPEL CORPORATION LIMITED (SGX:BN4) | SGinvestors.io 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.



1H19/2Q19 RESULTS


Solid contribution from the infrastructure segment

  • 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.

Offshore & Marine (O&M) segment sequentially stronger.

  • 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.

  • 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.


STOCK IMPACT


Gearing to continue to increase.

  • 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.

Turnaround in investments 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.


EARNINGS REVISION/RISK

  • Maintain forecasts. We have forecasts time.


VALUATION/RECOMMENDATION

  • 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.


SUM-OF-THE-PARTS VALUATION


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.

SHARE PRICE CATALYST

  • 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



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