Keppel Corporation - DBS Research 2019-10-18: ROE Enhancement Is The Key

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

Keppel Corporation - ROE Enhancement Is The Key

  • KEPPEL CORPORATION LIMITED (SGX:BN4)'s 3Q19 net profit declined 30% y-o-y in the absence of major property divestment gains.
  • O&M remains profitable; orderbook declined marginally to S$5.1bn.
  • Trimmed FY19/20F net profit by 10/7%.
  • Maintain BUY; Target Price lowered to S$ 7.50.



Maintain BUY; Target Price reduced to S$ 7.50

  • Maintain BUY; Target Price reduced to S$ 7.50, as we lowered property’s valuation to 0.9x P/B (prev 1.0x) and O&M’s valuation multiple to 1.5x P/B (prev 1.8x), reflecting higher risk premium given the weaker macro outlook.
  • 9M19 profit fell 36% y-o-y due largely to lower en-bloc sales, which tends to be lumpy. We have trimmed our FY19/20F earnings by 10/7%.
  • Keppel Corp is well positioned to benefit from the recovering O&M orders and rising property sales in key tier 1 and 2 cities in China and Vietnam.


Keppel Corp's 3Q19 results below expectations

  • Keppel Corp's 3Q19 net profit declined ~30% y-o-y to S$159m, due largely to the absence of major en-bloc sales (vs gain of ~S$110m for sale of Quoc Loc Phat in 3Q18), which tend to be lumpy. This brings 9M19 profit to S$515m (-36% y-o-y), making up only ~58% of our and consensus’ expectations.
  • We have trimmed our FY19/20F net profit by 10%/7% after lowering en-bloc sales profit assumption (by ~S$50m a year) and recurring M1 acquisition charges (~S$14m a quarter).including intangible amortisation, funding cost and professional fees.
  • We expect a stronger 4Q, driven by potential gain from divestment of Keppel DC Singapore 4, property revaluation gains and Tianjin land sales.




O&M continues to make a slight profit.

  • O&M segment reported sequential improvement in net profit to S$8.5m, from ~S$3.6m in 2Q19.

Net orderbook declined slightly to S$5.1bn, from S$5.5bn a quarter ago

  • Net orderbook declined slightly to S$5.1bn, from S$5.5bn a quarter ago, as Keppel Corp did not bag any new orders during the quarter.
  • In 1H19, Keppel Corp won S$1.9bn worth of orders, surpassing the S$1.7bn secured during the whole of 2018. This included 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 Semi upgrade works (S$160m).

Closing the Sete chapter.

  • In early Oct, Keppel Corp entered into a settlement agreement with Brazilian customer Sete Brasil on the six uncompleted semi-submersible drilling rigs as construction works had been halted since end 2015. The first two most advanced rigs – 92% and 70% completed – will be purchased by Magni Partners (Bermuda) Ltd. Keppel Corp is in negotiation with Magni on the price to complete the two units.
  • As for the subsequent four units, Keppel Corp will take ownership of these uncompleted rigs. Management believes the provision made for these units is adequate.


Property contributed half of 3Q19 profit.

  • Property division posted a net profit of S$77m in 3Q19, down 52% y-o-y. 9M19 property profit declined 56% y-o-y to S$340m, due largely to lower en-block sales, partially offset by a pick up in property trading.
  • In 9M19, Keppel Corp recorded en-bloc sales gains of ~S$50m from the divestment of a 70% interest in Dong Nai Waterfront City (Vietnam) in 1Q19. This is much lower than the gains of ~S$544m in 9M18 from the sale of Keppel Cove (c.S$300m), Keppel Township Development Shenyang, and Keppel Bay Property Development (Shenyang) as well as Quoc Loc Phat (c.S$111m)

Stronger home sales.

  • Keppel Corp sold ~3,520 homes in 9M19, up 12% y-o-y, with a total sales value of S$2.1bn, of which 66% was sold in China, 19% in Vietnam, 5% in Singapore, 3% in Indonesia and 7% in India. It has sold 8,4400 overseas units worth ~S$3.1bn to be recognised from 4Q19-2022.
  • 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 Corp continues to see strong demand for well-located projects in high growth cities.


Infrastructure net profit in 3Q19 nearly doubled q-o-q to S$86m, from S$42m in 2Q19.

  • This is largely driven by dilution gains arising from KEPPEL DC REIT (SGX:AJBU)’s equity fund raising exercise, and fair value adjustment for Keppel DC Singapore 4.


Investment profit totaled S$12m in 9M19.

  • Re-measurement gains of previously held interest in M1, higher contribution from M1, and higher income from Keppel Capital was offset by share of losses from KrisEnergy, recurring charges relating to M1 and impairment.
  • There were two land sales in Tianjin Eco-city in 3Q19, and the first transaction was completed and recognised during the quarter while sale of the second plot of land will be booked in 4Q19.


Net gearing rose to 0.88x as of end Sep-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.


ROE targets maintained.

  • While ROE has dropped to ~6% in 3Q19, management remains confident to achieve the medium-term Group ROE target of ~15% through O&M recovery and quicker asset turn for the property business.


Valuation:

  • Our Target Price of S$7.50 is based on sum-of-parts valuation:
    1. property segment at 35% discount to RNAV or approx. 0.9x P/BV,
    2. Tianjin Eco-city land sales using DCF assuming 10% WACC,
    3. O&M segment is valued at 1.5x P/BV,
    4. infrastructure at 15x PE on FY19F earnings, and
    5. investment (Keppel Capital) at 15x FY19F earnings.
  • Our S$7.50 Target Price implies 1.2x FY19 P/BV.
  • See Keppel Corp share price; Keppel Corp dividend history.


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.





Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2019-10-18
SGX Stock Analyst Report BUY MAINTAIN BUY 7.50 DOWN 8.500



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