Keppel Corporation - RHB Invest 2020-04-30: Infrastructure’s Strength Amidst General Weakness

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - Infrastructure’s Strength Amidst General Weakness

Maintain BUY, with lower SGD7.40 Target Price from SGD7.60, offering 24% upside with c.3% yield.
Keppel Corp (SGX:BN4)'s results were below expectations, with 1Q20 net profit of SGD160m (down 21% y-o-y) representing 18% and 20% of our pre-results and Street’s full-year estimates.
We cut our earnings over the next couple of years due to the impact from COVID-19, but we believe the longer term potential is good (the O&M net orderbook of SGD4.0bn at the end of March, is close to the SGD4.4bn amount at the end of December 2019).

Keppel Corp's Infrastructure division recorded a surge in 1Q20 net profit to SGD174m vs SGD16m in 1Q19. This incorporates a gain of SGD131m from the reclassification of Keppel Corp’s interest in Keppel Infra Trust (SGX:A7RU) from its associate company to investment. Excluding this one-time gain, infrastructure earnings would have doubled y-o-y, with higher contributions from Energy Infrastructure.

The property division’s 1Q20 net profit of SGD35m was 73% lower y-o-y, due to a gain in 1Q19 from the disposal of a partial interest in Dong Nai Waterfront City, Vietnam. However, Keppel Land sold 450 homes in 1Q20, 15% higher y-o-y. Management said that recent land sales in China (post COVID-19 lockdown) show promise as developers are bidding again and prices seem to stabilize.

O&M division’s 1Q20 net profit of SGD3.0m was down from 1Q19’s SGD6m, due to share of losses from associated companies. Keppel Corp’s 1Q20 O&M operating profit was a strong SGD28.0m, versus 1Q19’s SGD3.0m. Whilst a lower crude oil price is a headwind, more than 70% of Keppel O&M’s orderbook of SGD4.0bn comes from renewables and gas-related solutions.

We cut net profit 11% in FY20F and 14% in FY21F as we lowered our O&M and property earnings. Despite these, Keppel Corp is still trading at an attractive FY20F P/E of 14x.
The end-April sale of a 2.33% stake in Keppel DC REIT (SGX:AJBU), should give Keppel Corp a gain of SGD46.0m to be recorded in 2Q20. See Keppel Corp Announcements.

Keppel Corp has multiple businesses in different industries therefore, we used the SOP methodology to value the stock.
Our Target Price of SGD7.40 is based on the estimate of the O&M division, valued at 1.34x FY20F P/BV or 0.5SD below the 5-year average of 1.53x P/BV for Sembcorp Marine (SGX:S51) (BUY, Target Price: SGD1.45, see report: Sembcorp Marine - RHB Invest 2020-02-20: Higher FY19 New Orders, Expecting FY20 Losses).
Its infrastructure segment is valued conservatively at 10x FY20F P/E, while its property arm is valued at a 40% discount to RNAV.
See Keppel Corp Share Price; Keppel Corp Target Price; Keppel Corp Analyst Reports; Keppel Corp Dividend History; Keppel Corp Announcements; Keppel Corp Latest News.
The partial offer by Temasek offers potential for value unlocking. Keppel Corp's property division’s earnings should continue to support dividend payments.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-04-30

SGX Stock Analyst Report BUY MAINTAIN BUY 7.40 DOWN 7.600