• No major surprises from Keppel Corporation (SGX:BN4)’s 2Q19 net profit of S$153m but the new half-yearly revaluation exercise for investment property provided a nice boost.
• 1H19 profit was at 37% of FY19F but we are hopeful of a stronger 2H19 from better O&M (higher margins) and investments (SSTEC land sale).
• Interim DPS of S$0.08 was announced, or 41% payout.
• Property enbloc sales and stronger orders are key catalysts. Key risk: macro headwinds

O&M EBIT Slightly Better Than Expected But Associates Missed

• O&M EBIT margin of 2.4% was slightly above our 2% but net profit of S$4m was below our S$12m, affected by the negative q-o-q S$10m swing in share of associates. This was due to charter coming off in Floatel.
• The upcoming merger between Floatel and Prosafe (Keppel Corporation to own 22% of merged entity) may exert some pressure on utilisation, given the enlarged fleet of 16 vessels vs. Floatel’s 5 vessels.
• We keep our 5% EBIT margin expectations intact for FY19F from stronger recognition in the 2H. YTD 2019 contract wins were S$1.9m (60% LNG and renewables-related) and in line with our order win target of S$3.0bn. Orderbook at end-1H19 was S$5.5bn.
• O&M headcount up by 739 in 2Q19; on track to hit its target to hire 1,800 staff in 2019.

Property Boosted by Revaluation Gains

• Property net profit of S$130m was above our S$92m expectations due to adoption of mid-year revaluation to even out the lumpiness in income.
• Home sales in 2Q19 of 1,710 units (390 units in 1Q19) mainly comprised 910 units in China, 580 units in Vietnam and 60 units in Singapore. Strong China sales was due to well-located projects in Nanjing, Wuxi and Tianjin. Management expects the sale of 8,690 overseas units worth S$2.9bn from 2H19 to 2020.
• At end-1H19, Keppel Corporation has a residential landbank of 46k homes with 15k launch-ready units from 2H19 to 2021.

Infrastructure Supported by MDEP and Hong Kong Projects

• Infrastructure net East Desalination Plant (MEDP), which is > 85% completed and due to commence operations in 2020, and its Hong Kong Integrated Waste Management Facility, which has 1Q19.

Larger Than Expected Loss in Investments

• Investments’ S$23m loss of S$16m due to a S$4m loss from SSTEC, tail-end of M1 acquisition costs as well as mark-to-market loss of KrisEnergy warrants. Management sounded positive on the booking of land sales from SSTEC in 2H19.
• M1 secured > 15,000 new customers since the launch of its new simplified plan to replace its previous 19 plans in May 19; customer base at end-1H19 was 2.25m.

Maintain Add With Unchanged Target Price of S$8.41

• Key catalysts include stronger-than-expected O&M enbloc Brasil semi-subs and divestment of non-core businesses such as KrisEnergy.
• No change to EPS and SOP-based Target Price of S$8.41.
• We expect some pull back in Keppel Corp share price in the near term and see it as buying opportunity.
• Maintain ADD.

Source: CGS-CIMB Research - 18 Jul 2019