Keppel Corporation 1Q20 - UOB Kay Hian 2020-04-30: Cloudy Outlook


Keppel Corporation 1Q20 - Cloudy Outlook

  • Keppel Corp’s 1Q20 net profit of S$160m fell 21% y-o-y due to the high base in 1Q19 which saw a one-off gain from a Vietnamese property sale. All business units performed well in 1Q20.
  • While management did not commit to paying an interim dividend, we maintain our 40% payout forecast for 2020.
  • The negative impact of the COVID-19 outbreak has led us to lower our earnings estimates for 2020 and 2021, however, valuation remains inexpensive.

Keppel Corp reported a 21% y-o-y increase in revenue to S$1.9b

  • Keppel Corp (SGX:BN4) reported a 21% y-o-y increase in revenue to S$1.9b, however, net profit declined 21% y-o-y to S$160m due to an absence of a S$49m gain in 1Q19 from the disposal of a stake in Dong Nai Waterfront City in Vietnam. See Keppel Corp Announcements. Stripping this gain out, 1Q20 earnings met our expectations.

No commitment to maintaining interim dividend.

  • It should be noted that Keppel Corp does not have a specific dividend policy but nevertheless has paid out 36-57% of annual earnings in the past 10 years.
  • In 2003, when SARS affected the Singapore and Asian economies, the company had a payout ratio of 31%. Keppel Corp’s management stated that it, together with the board, will need to analyse 1H20’s financial performance before making a decision. See Keppel Corp Dividend History.
  • We have estimated a 40% dividend payout for 2020.

All core business units did well in 1Q20

  • with the infrastructure division standing out due to a S$131m gain as a result of the reclassification of Keppel Infra Trust (SGX:A7RU) as an investment.
  • Post quarter-end, a Keppel Corp-led consortium was awarded a S$1.5b contract for Phase 1 of Singapore’s Tuas Nexus Integrated Waste Management Facility. In addition, the company secured contracts to provide waste-to-energy solutions in India.

Positive outlook for property segment.

  • In 1Q20, Keppel Corp’s sales rose 15% y-o-y to 450 units (73% in China) with total sales value of c.S$320m; it has a remaining landbank of c.45,000 units.
  • Going forward, we believe that the property segment may be able to buttress the company’s earnings in a difficult year given that China has started to relax its COVID-19 lockdown rules and thus property transactions have resumed.
  • In Apr 20, Keppel Corp launched a residential development in Wuxi which saw a 65% sell-through in its opening weekend, while its Tianjin Eco City sold a residential plot for Rmb1.17b at a land price that was comparable to a similar plot sold in 2019. The latter will enable Keppel Corp to recognise a S$30m gain for 2Q20.
  • A number of projects are launch-ready in China and will be able to take advantage of the revival post-COVID-19. In Vietnam, the company does not have projects to launch yet as the approval process has been slow.

Strong margins for O&M segment in 1Q20

  • Strong margins for O&M segment in 1Q20 but downside risks remain. The offshore & marine (O&M) segment achieved a 5% gross profit margin in 1Q20 which was one of the best since 1Q18; however, we note Keppel Corp’s management highlighted near-term challenges in this segment, given the significantly reduced labour force at its Singapore shipyards; thus, margins may trend down over the next couple of quarters in our view.

Subsidiary divests small stake in Keppel DC REIT.

  • On 28 Apr 20, Keppel Corp announced that its wholly-owned subsidiary Keppel T&T had divested a 2.33% stake in Keppel DC REIT (SGX:AJBU) for S$91.96m resulting in a gain of about S$46m when the deal is completed on 30 Apr 20; this impact will therefore only be felt in 2Q20. See Keppel Corp Announcements.
  • Keppel Corp stated that it was an opportune move to realise profits, and that the funds will be “redeployed to capture new opportunities”. Keppel T&T remains a sponsor of the REIT and will continue to hold a 20.58% stake in Keppel DC REIT.

Investments division recorded a net loss of S$52m

  • On the negative side, the investments division recorded a net loss of S$52m due to the recognition of mark-to-market losses on funds as well as direct stakes in companies, and losses from Keppel Corp’s hospitality assets which have been negatively impacted by COVID-19 travel restrictions.

Downgrading earnings forecasts

Inexpensive based on PE and P/B valuation multiples.

  • Keppel Corp’s current one-year forward PE of 12.3x appears inexpensive as it is 14% below its 5-year average of 14.3x. In addition, the company’s one-year forward P/B multiple of 0.92x is -1SD below its 10-year historical average of 1.45x.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-04-30
SGX Stock Analyst Report BUY MAINTAIN BUY 7.15 DOWN 7.200