Keppel Corporation - CGS-CIMB Research 2020-04-29: No Adverse Material Change So Far

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - No Adverse Material Change So Far

Keppel Corp's 1Q20 net profit of S$160m is in line with our S$150m expectation, forming c.24% of our and 19% of consensus FY20F.
Infrastructure profit hit a record S$174m in 1Q from MTM gain. O&M was profitable; the enhanced JSS could help the unit avoid EBIT losses in 2Q20F.
Property profit was soft but recent launch in China was encouraging. We think Temasek’s partial offer is still valid.

Keppel Corp (SGX:BN4)’s 1Q20 group profit of S$160m (-21% y-o-y, -15% q-o-q) was lifted by infrastructure’s record profit of S$174m. The unit recognised a marked-to-market (MTM) gain of S$131m from the reclassification of Keppel Corp’s interest in Keppel Infrastructure Trust (SGX:A7RU) from an associated company to an investment, following the loss of significant influence over Keppel Infrastructure Trust (Keppel Corp currently holds 18% stake). Without this, infrastructure’s profit was up 84% q-o-q and 171% y-o-y, thanks to stronger performance from power and gas, and data centres.

O&M delivered 1Q20 EBIT profit of S$28m (5% EBIT margin), beating our expectation of 2.5%. However, net profit (S$3m vs. a loss of S$100m in 4Q19) was affected by share of losses in Floatel. Keppel Corp's O&M order book of S$4bn as at end-Mar would cushion any drought in orders in 2020F, in our view.
Currently, only urgent essential works such ship repairs are ongoing. Shipbuilding activities have scaled down in its six yards in Singapore; the two in the Philippines are not in operation. Its Nantong yard in China is back at work.
Keppel Corp has c.7k O&M workers, of which c.30% qualify for the enhanced Job Support Scheme (JSS) from the Singapore government; we estimate c.S$11m of cost relief in 2Q20F.

Property net profit of S$35m (-80% q-o-q, -73% y-o-y) was softer than our expected S$88m, mainly due to deferral in the completion of projects as well as weaker investment income (loss of S$11m) with i12 Katong under redevelopment.
Keppel Corp's property sales in China have been encouraging with 330 units sold in 1Q20, of which more than 200 units were sold post Covid-19 lockdown in Feb-Mar. Last Saturday, it launched a 251-unit residential project in Wuxi; 164 units (65%) were sold over the weekend, at comparable y-o-y prices.

In regards to Temasek's partial offer, management said Keppel Corp has not breached the material adverse change indicators. We believe Keppel Corp could be a recovery story on the back of improving home purchase sentiment in China and Vietnam as Covid-19 lockdowns ease. Being a conglomerate also means Keppel Corp has ample ammunition to gain from capital recycling/asset re-measurements exercises.
See Keppel Corp Share Price; Keppel Corp Target Price; Keppel Corp Analyst Reports; Keppel Corp Dividend History; Keppel Corp Announcements; Keppel Corp Latest News.
Keppel Corp is trading at c.0.95x CY20F P/BV vs. 0.8x P/BV during the 2016 oil crisis and GFC's trough of 1.33x P/BV.
Reiterate ADD and S$7.48 Target Price.
The key catalyst/downside risk is the partial offer by Temasek at S$7.35/share before 21 Oct 020.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-29

SGX Stock Analyst Report ADD MAINTAIN ADD 7.480 SAME 7.480