Keppel Corporation - RHB Invest 2020-08-03: Sharp Impairments, But Stable Recurrent Earnings

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - Sharp Impairments, But Stable Recurrent Earnings

Keppel Corp (SGX:BN4) incurred a 1H20 net loss of SGD537m, compared with 1H19’s SGD256m net profit. Excluding impairments (mainly for O&M), 1H20 recurring net profit of SGD393m is 57% and 54% of our and Street’s FY20F.
Keppel Corp’s recurrent earnings should gradually rise, supported by growing infrastructure and property income, and O&M improvement given its Jun 2020 net orderbook of SGD3.5bn.

Maintain BUY with unchanged SGD7.30 Target Price, offering 35% upside with c.2% yield.

Infrastructure division 2Q20 net profit surged 81% y-o-y to SGD78m. This is due to gain from sale of units in Keppel DC REIT (SGX:AJBU), contribution from environmental infrastructure and dividend income from Keppel Infrastructure Trust (SGX:A7RU).
Demand remains strong for data centres, and in Jun 2020, Keppel T&T secured government approval to develop a new data centre at Genting Lane.

Property division 2Q20 net profit rose 25% y-o-y to SGD162m, from higher fair value gains from investment properties and higher contributions from Singapore property trading projects.
In 1H20, 1,230 homes were sold, with the bulk of 1,050 in China. Keppel REIT (SGX:K71U)’s office buildings have high occupancy rates of 99% as at 30 Jun.

The O&M division recorded SGD889m provisions in 2Q20, mainly from contract assets of SGD431m and share of Floatel’s vessel impairment of SGD227m. Excluding impairments, 1H20 O&M EBITDA is a positive SGD40m.
YTD, SGD107m worth of offshore wind and FPSO projects were secured.

The change is mainly due to the 2Q20 impairments. We forecast FY21 net profit of SGD784m, giving a respectable 12x P/E.
While the Material Adverse Change (MAC) clause (mentioned in Temasek’s pre-conditional partial offer) is triggered due to the 2Q20 losses, Temasek can opt to waive the pre-conditions.
Post results, Temasek indicated that it will decide by 31 Aug if it intends to invoke the MAC pre-conditions. If the offer proceeds (which we believe is likely), it will catalyse Keppel Corp's share price.

Our SOTP-derived Target Price of SGD7.30 for Keppel Corp is based on the estimate of the O&M division, valued at 1.36x FY20F P/BV, same as the 5-year average of 1.36x P/BV for Sembcorp Marine (SGX:S51) (BUY, Target Price: SGD0.55, see report: Sembcorp Marine - RHB Invest 2020-07-16: COVID-19 Losses, But Projects Not Cancelled; BUY). Infrastructure is valued at 10x FY21F 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.
Temasek’s offer could lead to value unlocking.
Property earnings should continue to support dividend payment - 3 SG cents declared for 1H20 (1H19: 8 SG cents).

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-08-03

SGX Stock Analyst Report BUY MAINTAIN BUY 7.300 SAME 7.300