Keppel Corporation - RHB Invest 2020-01-24: O&M Unit Turns Around In FY19; Maintain BUY


Keppel Corporation - O&M Unit Turns Around In FY19; Maintain BUY

  • Maintain BUY, unchanged Keppel Corp Target Price offers 16% upside plus c.4% FY20 yield.
  • Keppel Corporation (SGX:BN4)’s 4Q19 results are slightly below expectations, with FY19 net profit of SGD707m (down 25% y-o-y, see Keppel Corp Announcements) representing 92% and 86% of our and Street full-year estimates.
  • We are bullish on its outlook, and expect its offshore and marine (O&M) earnings to improve, supported by its FY19 net orderbook of SGD4.4bn (FY18: SGD4.3bn). In the meantime, its property division’s earnings should support dividends.

Property division contributed the bulk of FY19 net profit.

  • The property division’s FY19 earnings of SGD517m accounted for 73% share of total net profit, although it was down 45% y-o-y. This was due to fewer en bloc sales and divestments in 2019.
  • Keppel Corporation expects to recognise revenue from the sale of ~8,720 overseas homes worth SGD3.9bn, upon completion and handover from 2020 until 2022. The strategy is to turn assets faster, to achieve a target 12% ROE for Keppel Land.

O&M division’s FY19 net profit of SGD10m

  • Its O&M division’s FY19 net profit of SGD10m marks a reversal from FY18’s SGD109m net loss – on the back of an 18% revenue growth. 2019 new order wins were in excess of SGD2bn, up 18% y-o-y. Keppel O&M expects to increase its headcount by a further 1,500 in 2020 to manage the increased workload.

Infrastructure division's FY19 net profit of SGD168m

  • Infrastructure division achieved a stable FY19 net profit of SGD168m. Keppel Marina East Desalination Plant is scheduled to commence operations in 1H20, and will start contributing to earnings.

We trim FY20F net profit by 5%

  • We trim FY20F net profit by 5% as we cut our forecasted O&M margin. Despite this reduction, Keppel Corporation is still trading at an attractive FY20F P/E of 11.9x.

Valuation – diversified asset structure with huge value unlocking potential.

  • Keppel Corporation has multiple businesses in different industries, and we used the SOP methodology to value the stock.
  • Our Target Price is based on the O&M division, which is valued at 1.4x FY20F P/BV – at a discount over the 5- year average 1.6x P/BV of Sembcorp Marine (SGX:S51). Its infrastructure segment is valued conservatively at 10x FY20F P/E, while its property arm is valued at a 40% discount to RNAV – close to the average discount to RNAV applied for China-listed property developers.

Leng Seng Choon CFA RHB Securities Research | 2020-01-24
SGX Stock Analyst Report BUY MAINTAIN BUY 7.800 SAME 7.800