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


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

  • 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

  • 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.

Provisions key cause of offshore & marine (O&M) loss.

  • 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.

We now forecast Keppel Corp's FY20 net loss of SGD167m, vs recurring SGD752m net profit forecast.

  • 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.

Value unlocking potential.

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