Simons Trading Research

Author: simonsg   |   Latest post: Tue, 20 Oct 2020, 12:11 PM


Keppel Corporation - Weak 3Q Earnings, O&M Outlook Positive; BUY

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  • Maintain BUY with new SGD7.18 Target Price from SGD7.30, 20% upside plus 4% yield.
  • Keppel Corporation (SGX:BN4)'s 3Q19 results were below expectations, with 9M19 net profit of SGD515m representing 58% of our pre-results 2019 forecast. However, we are bullish on Keppel Corporation, with expectations of improving O&M earnings from a stronger net orderbook – SGD5.1bn from FY18’s SGD4.3bn.
  • In the meantime, the property division earnings should support dividend payment. See Keppel Corporation's dividend history.

Property Division 3Q19 PBT Halved Y-o-y

  • Property division 3Q19 PBT halved y-o-y (to SGD123m) due to absence of divestment gain of Beijing Aether and higher net interest expense. However, there was some offsetting effect by higher property trading profits in China and Singapore.
  • The property division remains the largest contributor to 9M19 net profit – at 66% share.

Offshore & Marine (O&M) Division’s 3Q19 Revenue Surged 52% Y-o-y

  • Offshore & Marine (O&M) division’s 3Q19 revenue surged 52% y-o-y to SGD632m, due to higher revenue recognition from ongoing projects. However, O&M PBT was down 20% y-o-y to SGD8m mainly due to net interest expense (vs 3Q18 net interest income).
  • On a positive note, new contracts secured by Keppel O&M (KOM) YTD amounted to SGD1.9bn, with close to 60% for LNG and renewables-related projects. KOM’s settlement agreement with Sete Brasil paves the path for completion of construction of some (or all) of the rigs, which should help drive revenue going forward.

Infrastructure Division Saw 3Q19 Datacentre Fair Value Gains

  • Infrastructure division saw 3Q19 datacentre fair value gains, helping PBT expand 53% to SGD92m. This datacentre investment property – the Keppel DC Singapore 4 – will be divested to Keppel DC REIT (SGX:AJBU).

We Cut FY19F Net Profit by 14%

  • Given the weak 3Q19 earnings, we cut FY19F net profit by 14% to SGD769m. However, we believe FY20F earnings will recover from improvement in the property and O&M businesses.

Valuation – Diversified Asset Structure With Huge Value Unlocking Potential

  • Keppel Corporation has multiple businesses in different industries, and we used SOP methodology for valuation, before arriving at a Target Price of SGD7.18, based on
    • O&M division valued at 1.4x FY20F P/BV, a premium over the 4- year average 1x P/BV of Sembcorp Marine (SGX:S51) (BUY, Target Price: SGD1.63, see report: Sembcorp Marine - Early Signs Of Order Win Recovery);
    • its infrastructure division valued conservatively at 10x FY20F P/E; and
    • property division valued at 40% discount to RNAV – close to the average discount to RNAV applied for China listed property developers.

Source: RHB Invest Research - 17 Oct 2019

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