Keppel Corporation - DBS Research 2020-04-30: A Step Closer To Temasek’s Partial Offer


Keppel Corporation - A Step Closer To Temasek’s Partial Offer

  • Keppel Corp's 1Q20 PATMI of S$160m was lifted by gains from divestment and reclassification of associates.
  • Expect 2Q20 to be bolstered by pickup in property completions in China, Tianjin Eco-city land sales, divestment gains.
  • Temasek’s partial offer remains in the spotlight.

Reiterate BUY; Target Price reduced to S$6.80 on lower O&M valuation.

  • Keppel Corp (SGX:BN4)’s diversified businesses would allow it to weather the economic slowdown better. The property market in China (~50% of Keppel Corp’s property valuation) is seeing encouraging signs of a pickup in property sales with selling prices similar to pre-COVID level.
  • All eyes remain on the strategic review upon Temasek potentially gaining majority control post a successful partial offer, which will likely be in 2H20. Valuation is undemanding at 0.9x P/BV, which is c.1SD below mean, offering 3% dividend yield.
  • We have reduced our Target Price to S$6.80 as we lowered O&M’s valuation from 1.5x to 1.2x in anticipation of slower order wins following capex cuts by oil majors.

Temasek’s partial offer lends support.

  • Temasek’s partial offer to acquire an additional ~30% stake in Keppel Corp at S$7.35 should lend support to share price. We estimate that, assuming a successful tender for 39% of the shares, the offer could lower the cost per share for shareholders by ~88 Scts at the current share price.


  • Keppel Corp's 1Q20 net profit came in at S$160m (-21% y-o-y; -16% q-o-q), making up ~19% of our full year forecast.
  • Results were aided by reclassification gains of Keppel Infra Trust (SGX:A7RU) (from associate to investment, S$131m) and divestment gains from a disposal of a 30% stake in FLNG Gimi (S$32m). These mitigated the slower property completions in China due to the COVID-19 lockdown in Feb-Mar, fair value losses on investments due to share price declines (~S$20m), and impairment on Kris Energy (SGX:SK3) (S$18m).
  • Looking into 2Q20, we expect earnings to be bolstered by:
    1. pickup in property completions in China, lifting property contribution closer to usual run rate of S$80m a quarter;
    2. Tianjin Eco-city land sales that were concluded in April, to contribute ~S$30m to bottomline;
    3. Divestment gains of S$46m from disposal of a 2.33% stake in Keppel DC REIT (SGX:AJBU); and
    4. potential fair value gains on investments and revaluation gains on investment property, if market conditions improves.
  • But profit will be partially offset by potential O&M losses in 2Q20 due to low shipyard activity because of COVID-19.

Earnings revisions.

  • We have trimmed our FY20/21F earnings by 10/9% after lowering
    1. O&M contract wins assumption by S$1bn each year to S$1.5bn / 2.5bn, and
    2. profit from Tianjin Ecocity by S$30-50m on lower land sales, out of prudence.


  • Temasek partial offer is progressing. We understand that clearance of relevant regulatory and authorities are making progress.
  • Keppel Corp will likely be able to meet the pre-conditions of “no adverse material change” in our view:
    1. Keppel Corp not recognising more than S$500m of additional provisions attributed to any claim, litigation, investigation or proceedings during this time;
    2. Net Asset Value (NAV) not falling by more than 10%;
    3. Trailing 12-month net profit at each quarterly result must not fall below S$557m (decline not more than 20% from trailing 12-month net profit of S$696m at Sept 2019).
  • In order to fulfil the earnings pre-conditions, Keppel Corp will need to report net profit > S$46m in 2Q20, which seems to be manageable, based on our above discussions regarding 2Q20 earnings estimate.
  • Assuming a successful tender of 39% of shares, the partial offer could lower cost per share by ~88 Scts from the current share price.


  • Property contributed 22% of 1Q20 profit. Property division posted a net profit of S$35m in 1Q20, down 73% y-o-y from S$132m in 1Q19, due largely to the absence of en-block sales (~S$50m in 1Q19), and slower property completions in China due to COVID-19 lockdown. We expect recovery to head back to the usual run rate of S$80-100m with the pickup in economic activity in China since Mar.

Encouraging home sales.

  • Keppel Corp sold ~450 homes in 1Q20, up 15% y-o-y, with a total sales value of S$320m, of which 73% was sold in China, 2% in Vietnam, 11% in Singapore, 7% in Indonesia, and 7% in India. It has sold 8,830 overseas units worth ~S$4.1bn to be recognised from 2Q20-2023. Of the 45,000 homes in the pipeline, about 16,100 homes are ready for launch from now till 2022, representing 3.1x of 2019 home sales. Keppel Corp continues to see good demand for well-located projects in high growth cities of China and Vietnam. Its commercial portfolio of 1.6m sm GFA (~50% under development) bodes well for stable recurring income going forward.
  • In Singapore, the redevelopment plan for Keppel Tower remains intact. We will likely see the launch of two residential projects here – Nassim Woods and Keppel Bay Plot 4, if market conditions permit.

O&M back in the black in 1Q20, with a small profit of S$3m.

  • However, we expect the division to be loss-making in 2Q as operations are affected by COVID-19 especially in Singapore and the Philippines.
  • Net orderbook declined to S$4bn, from S$4.4bn a quarter ago, in the absence of new contracts in 1Q. Management is hopeful of contracts in gas and renewable space as market stabilises.

Infrastructure net profit quadrupled to S$174m in 1Q20

Pei Hwa HO DBS Group Research | 2020-04-30
SGX Stock Analyst Report BUY MAINTAIN BUY 6.80 DOWN 7.500