Highlights

Keppel Corporation 3Q20 Business Update - a New Hope

Date: 30/10/2020

Source  :  UOB KayHian
Stock  :  Keppel Corp       Price Target  :  6.30      |      Price Call  :  BUY
        Last Price  :  5.30      |      Upside/Downside  :  +1.00 (18.87%)
 


  • Keppel Corp reported 9M20 revenue of S$4.8b (-11% y-o-y). On a quarterly basis, its 3Q20 revenue of S$1.6b (-21% y-o-y) was above our expectations of S$1.4b-1.5b.
  • Excluding O&M, Keppel Corp disclosed that its other businesses were profitable. Particular bright spots for the quarter were the infrastructure and asset management businesses which delivered strong performances.
  • Maintain BUY.

Keppel Corp's 3Q20 Business Update

  • Keppel Corporation (SGX:BN4)’s 3Q20 business update showed that while the offshore marine (O&M) segment is still struggling, there is reason for hope as other parts of its businesses did well; management commented that the non-O&M businesses were all profitable.
  • Keppel Corp disclosed that it generated S$4.8b in revenue for 9M20 (-11% y-o-y), forming 78% of our full-year estimate. Thus, 3Q20 revenue of S$1.6b (-21% y-o-y) was above our expectations of S$1.4b-1.5b.

Keppel Offshore & Marine (KOM) still struggling.

  • Although this segment generated a gross profit for 3Q20, it remained loss-making as this was insufficient to cover overheads. While no impairments were made for the quarter, the company said this segment will continue to face challenges in profitability for the rest of the year.
  • On the positive side, Keppel Offshore & Marine (KOM) won S$900m in new contracts this year, of which 72% were in the offshore renewables sector.

Keppel Offshore & Marine Will Continue to Manage Costs

  • Due to industry headwinds, Keppel Offshore & Marine will continue to manage costs, and management has stated that the annual overheads from this business segment will be reduced by $90m from the start of 2021. At present, its direct workforce in Keppel Offshore & Marine Singapore at end-3Q20 was 7,345 while the total (including overseas staff) was at 11,500.
  • Nevertheless, it appears that the company is well-placed to continue to win new, and importantly, sizeable orders in the offshore renewables space given that Keppel Offshore & Marine’s technology and solutions have proven to be suitable for this sector.
  • Crucially, it has proven its ability to deliver projects safely and on time since its entry into this sector in 2015.

Keppel’s Property Business Slowed Down Mainly Due to An Overall Economic Slowdown in China

  • Keppel Corp’s property business slowed down mainly due to an overall economic slowdown in China which led to a 32% y-o-y decline in sales of home units.
  • In Vietnam, the market has been very firm in secondary sales, however, the authorities have been very slow in approving pre-sales permits for the industry, thus leading to a 94% y-o-y decline in home unit sales; Keppel Corp expects the situation to stabilise starting 1Q21.
  • In China, the government has come down hard on overleveraged China property developers, but Keppel Corp has not been affected.

Expecting Medium-term Growth in the Infrastructure Business

  • The infrastructure business was one of the bright spots, generating EBITDA of S$119m (+3% y-o-y). Currently, this business unit has S$2.1b in waste-to-energy and district cooling contracts across Singapore, India and Thailand. Thus, the following revenue streams should come through from 2021 onwards:
    1. booking of engineering, procurement and construction (EPC) profits during the construction phase; and
    2. collect capacity and/or operations & maintenance payments once the project is up and running.

Dividends?

  • During the analyst call, Keppel Corp’s management would not be drawn in on whether it will maintain the same final dividends as 2019 (1H19 dividend: S$0.08/share; 2H19: S$0.12/share).

Keppel Corp Remains Well Funded

  • We note that Keppel Corp has reduced its net debt-to-equity from 1.00x as at end-1H20 to 0.96x as at end-3Q20. At the same time, it has been able to raise S$3b in loans as well as draw down on a S$800m Medium-Term Note. It thus appears that the company is able to fully finance its operations which is important due to the potential slow recovery out of the COVID-19 crisis.

Maintain BUY

  • While there was little detail on the progress of either a merger or divestment of Keppel Offshore & Marine, it was interesting to note that the company has set up a “Vision 2030 Transformation Office” involving a 100-day programme to drive results. We highlight that Keppel Corp has already announced two divestments with total proceeds of S$140m in Oct 20.
  • Conglomerates like Keppel Corp will invariably trade at a discount given the multiple business lines and multiple markets that they are involved in; however, we believe that should Keppel Corp succeed in unlocking value as it has planned, the discount between Keppel Corp share price and its valuation should quickly narrow.

Inexpensive on P/B Valuation

  • We highlight that that Keppel Corp’s one-year forward P/B multiple of 0.71x is at its -2SD level, and a significant discount to its 5-year historical average of 1.0x. Historically, Keppel Corp’s trough P/B of 0.29x occurred in Sep 98 at the height of the Asian Financial Crisis, but had recovered to 1.0x P/B by end-98.

Source: UOB Kay Hian Research - 30 Oct 2020

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