• KEPPEL CORPORATION (SGX:BN4)'s 3Q19 net profit of S$159m was below consensus, with 9M19 net profit of S$516m forming 54% of our FY19F. Expectations were high on property.
• The lack of bulky divestment gains resulted in -52% y-o-y and -40% q-o-q profits in property. O&M continued to deliver profits and improvement in margins.
• The stock is trading at an undemanding 0.9x FY19 P/BV or -1 s.d. of its 10- year mean.
• Maintain ADD with a lower Target Price of S$8.36, based on SOP.

Tailwinds From O&M

• O&M 3Q19 revenue grew 31% q-o-q and 52% y-o-y to S$631m, thanks to the initial recognition of Awilco semi-submersible 2 as well as offshore wind projects secured in 1H19. This lifted 3Q EBIT margin to 5.2% (1H19: 3.1%). This trend is likely to remain in the next few quarters. Overall profit, however, was dampened by losses in its associate company, Floatel, that had five vessels off charter.
• On the brighter side, YTD order wins stood at S$1.9bn with order book at S$5.1bn. We estimate the final settlement of Sete Brasil rigs by 1Q20 which could add US$166m-316m of new orders (see report: Offshore & Marine - Brazilian Rigs Set Free).
• We also expect Keppel Corporation to end the year with S$2.2bn of new wins. We keep our S$3bn target intact for 2020.

Higher Sales But Lower Gains, Expect Stronger 4Q19

• Property achieved +47% q-o-q and 117% y-o-y increase in revenue to S$391m with stronger completion in China and Vietnam. Profits dropped q-o-q and y-o-y with the lack of enbloc sales (3Q18: S$122m from the divestment of Beijing Aether) and 1H19 revaluation gains of S$32m.
• Home sales momentum dropped 17% q-o-q to 1,420 units with lower sales in Vietnam (50 units in 3Q19 vs. 580 units in 2Q19), offset by 31% q-o-q growth in China home sales to 1,190 units. About S$400m of home sales will be completed in 4Q19, mainly from Vietnam.
• With stronger PBT margins (c.30%), we expect stronger q-o-q earnings for the property division in 4Q19. Management updated that the plan to redevelop Keppel Towers is still on track.

Lower Losses in Investments, Infrastructure Lifted by Gains

• Tianjin Eco-city land sales helped to cushion the losses in Kris Energy (SGX:SK3) as the investment division registered lower q-o-q losses of S$13m in 3Q19.
• M1 contributed steady S$21m profit but interest costs and amortisation also rose accordingly. We believe a concrete transformation plan is necessary to make the investment in M1 worthwhile.
• Infrastructure profit grew 100% q-o-q and 56% to S$86m on stronger power and gas sale and fair value gain from Keppel DC’s SG4 as well as dilution gain from Keppel DC REIT (SGX:AJBU) placement.

Maintain ADD But Lower Target Price

• Our earnings are cut by 10-16% for FY19-21F as we made the following changes to our forecasts:
  • Lower profits from property from divestment gains;
  • Lower profits from investments with slower annual land sales in Tianjin Eco-city and higher interest costs from M1 acquisitions;
  • Lower O&M profits to account for losses in Floatel;
  • Higher profits for infrastructure to account for SG4-related gains.
• We like Keppel Corporation for its nimble execution strategy. Management is keeping its mid-to long-term ROE target of 15% with upside from O&M, in our view. Catalysts include stronger enbloc property sales and offshore orders.

Source: CGS-CIMB Research - 17 Oct 2019