• Soft 2Q16 results
• Key overseas property markets healthy
• Lower interim dividend of S$0.08/share

2Q16 results lower than expected

Keppel Corp (KEP) reported a 37% YoY drop in revenue to S$1.6b and a 48% fall in net profit to S$205.8m in 2Q16, while 1H16 net profit fell 45%, mainly due to weaker results from O&M, and also the absence of one-time gains from the Infrastructure division a year ago. The impact was cushioned by good performance from the Property segment, which is now the biggest contributor to bottom-line. Overall, results were lower than expected, as 1H16 net profit accounted for 40% and 36% of ours and the street’s full year estimates, respectively.

Property to buttress group

The Chinese property market remains healthy in the key cities where KEP operates, despite the tightening of cooling measures in a few Tier 1 cities. About 86% of the group’s homes sales in 1H16 were in China, especially Chengdu, Wuxi and Tianjin. Looking ahead, KEP expects contributions from 3,400 units of overseas homes sold to be recognised as the homes are completed from 2H16 through 2018. The group also has close to 18,500 launch-ready homes in its pipeline from now through 2018, most of which are in China, followed by Vietnam.

Further newbuild deferments

In the offshore side, KEP has received requests to defer the delivery of three jackups for Grupo R and one jackup for Parden Holdings to next year. The contracts remain valid and KEP will be compensated for the delays. The outlook for the rig market remains weak, but KEP is still receiving enquiries for production platforms and FSRUs. As for the Can Do drillship that is under construction, there are no cost overruns and the unit could even be completed slightly below budget. Meanwhile, the group’s net order book currently stands at about S$4.3b, excluding the Sete Brasil projects which amounted to about S$4b.

Lower interim dividend of S$0.08/share

The group has declared an interim dividend of S$0.08/share for 1H16, compared to S$0.12/share in 1H15. We incorporate the recently-formed Keppel Capital into our sum-ofparts valuation, and also update our valuations for the O&M and property segments. As such, our fair value estimate rises slightly to S$5.68. Maintain HOLD; we would turn buyers around S$5.30.

Source: OCBC Research - 22 Jul 2016