Keppel Corporation - DBS Research 2020-01-24: All Eyes On Potential Strategic Review

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - All Eyes On Potential Strategic Review

Keppel Corp's FY19 missed ours and consensus estimate by ~12% due largely to write-offs and provisions of ~S$100m.
ROE enhancement remains a focal point.
Declared 12 Scts final dividend.
Maintain BUY; Target Price S$ 7.50.

Keppel Corporation (SGX:BN4)'s 4Q19 net profit came in at S$191m (+42% y-o-y; +20% q-o-q) below ours and market expectations of ~S$290m, dragged by write-offs and provisions for bad debt, as well as writing off its equity investment in KrisEnergy, totaling ~S$100m.
Results were aided by S$63m revaluation gain of investment properties and ~S$15m profit from sale of Tianjin Eco-city land, which were widely expected. This brought FY19 profit to S$707m (-25% y-o-y), below market expectations of ~S$800m.
We have lowered our FY20F earnings by 9%, factoring in lower O&M profits and property en-bloc sales.

Property division posted a net profit of S$517m in FY19, down 45% y-o-y, due largely to lower en-block sales, partially offset by a pickup in property trading.
For 2019, 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 was much lower than the gains of ~S$544m in 2018 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)

Keppel Corp sold ~5,150 homes in 2019, up 16% y-o-y, with a total sales value of S$3.2bn, of which 66% was sold in China, 18% in Vietnam, 5% in Singapore, 6% in Indonesia, and 5% in India. It has sold 8,720 overseas units worth ~S$3.9bn to be recognised from 2020-2022. Of the 45,200 homes in the pipeline, about 17,400 homes are ready for launch from now till 2022, representing 3.4x of 2019 home sales. Notwithstanding the cooling measures in China, Keppel Corp continues to see strong demand for well-located projects in high growth cities. Its commercial portfolio of 1.6m sm GFA (~50% under development) bodes well for stable recurring income going forward.
In Singapore, Keppel Corp has submitted a redevelopment proposal for Keppel Tower. In 2020, we will likely see the launch of two residential projects here – Nassim Wood and Keppel Bay Plot 4.

O&M swung back to a small loss of S$8m in 4Q19, after three consecutive quarters of positive earnings, partly due to impairment for Floatel in view of the low vessel utilisation of 20-40%. Though, on full year basis, the segment reported profits of S$10m. We expect the segment to turn profitable in the coming quarters as activity level climbs.
Net orderbook declined to S$4.4bn, from S$5.1bn a quarter ago, in the absence of big contracts in 4Q. Keppel Corp secured new contracts worth ~S$2.1bn in 2019, including 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, semi upgrade works (S$160m) as well as scruber and ballast water treatment system retrofit works (S$160m).
Management is seeing stronger enquiries, which hopefully will translate to firmer contract flow ahead.

Infrastructure net profit in 4Q19 nearly halved y-o-y to S$23m due to provisions for doubtful debts amounting to S$18.4m, including fair value loss on Qatar claims which is expected to stretch over a few years. The segment reported total profit of S$168m in 2019, similar to a year ago.

Re-measurement gains of its previously held interest in M1, higher contribution from M1, and higher income from Keppel Capital was offset by share of losses and full write-down of its remaining equity investment (~S$37m) in KrisEnergy, as well as recurring charges relating to M1.
In 2019, there were two land sales in Tianjin Eco-city, which concluded in 3Q19. The first transaction was completed and recognised during the quarter while the second plot was booked in 4Q19. Land sales profits totaled ~S$49m.
M1 and StarHub (SGX:CC3) have signed an exclusive agreement to cooperate and submit a joint bid for a 5G licence by 17 February 2020. However, we understand it is premature for management to share any commercial details at this juncture.
Keppel Infrastructure Fund with S$1bn target size will be launched soon. Project Gimi will be the first asset to be injected.

Including 8 Scts interim dividend, total dividend for FY19 was 20 Scts translating to ~3% dividend yield. This represents ~50% payout ratio, in line with management guidance.

This arose due to 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.

While ROE has dropped to ~6% in 2019, management remains confident to achieve the medium-term Group ROE target of ~15% through O&M recovery and quicker asset turn in the property business.

Stock remains undemanding at 1x P/Bv, which is c.1SD below mean, offering 3% dividend yield. FY19 profit fell 25% y-o-y to S$707m due largely to lower en-bloc sales, which tends to be lumpy, aggravated by write-offs and provisions.
Keppel Corp is well positioned to benefit from the recovery in O&M orders and rising property sales in key tier 1 and 2 cities in China and Vietnam.
All eyes are on the strategic review upon Temasek gaining majority control post successful partial offer, which will likely be in 2H20, in our view.
See Keppel Corp Share Price; Keppel Corp Target Price; Keppel Corp Analyst Reports; Keppel Corp Dividend History; Keppel Corp Announcements; Keppel Corp Latest News.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2020-01-24

SGX Stock Analyst Report BUY MAINTAIN BUY 7.500 SAME 7.500