• Keppel Corp’s 1Q20 net profit of S$160m fell 21% y-o-y due to the high base in 1Q19 which saw a one-off gain from a Vietnamese property sale. All business units performed well in 1Q20.
• While management did not commit to paying an interim dividend, we maintain our 40% payout forecast for 2020.
• The negative impact of the COVID-19 outbreak has led us to lower our earnings estimates for 2020 and 2021, however, valuation remains inexpensive.

Keppel Corp Reported a 21% Y-o-y Increase in Revenue to S$1.9b

• Keppel Corp (SGX:BN4) reported a 21% y-o-y increase in revenue to S$1.9b, however, net profit declined 21% y-o-y to S$160m due to an absence of a S$49m gain in 1Q19 from the disposal of a stake in Dong Nai Waterfront City in Vietnam.

No Commitment to Maintaining Interim Dividend

• It should be noted that Keppel Corp does not have a specific dividend policy but nevertheless has paid out 36-57% of annual earnings in the past 10 years.
• In 2003, when SARS affected the Singapore and Asian economies, the company had a payout ratio of 31%. Keppel Corp’s management stated that it, together with the board, will need to analyse 1H20’s financial performance before making a decision.
• We have estimated a 40% dividend payout for 2020.

All Core Business Units Did Well in 1Q20

• with the infrastructure division standing out due to a S$131m gain as a result of the reclassification of Keppel Infra Trust (SGX:A7RU) as an investment.
• Post quarter-end, a Keppel Corp-led consortium was awarded a S$1.5b contract for Phase 1 of Singapore’s Tuas Nexus Integrated Waste Management Facility. In addition, the company secured contracts to provide waste-to-energy solutions in India.

Positive Outlook for Property Segment

• In 1Q20, Keppel Corp’s sales rose 15% y-o-y to 450 units (73% in China) with total sales value of S$320m; it has a remaining landbank of 45,000 units.
• Going forward, we believe that the property segment may be able to buttress the company’s earnings in a difficult year given that China has started to relax its COVID-19 lockdown rules and thus property transactions have resumed.
• In Apr 20, Keppel Corp launched a residential development in Wuxi which saw a 65% sell-through in its opening weekend, while its Tianjin Eco City sold a residential plot for Rmb1.17b at a land price that was comparable to a similar plot sold in 2019. The latter will enable Keppel Corp to recognise a S$30m gain for 2Q20.
• A number of projects are launch-ready in China and will be able to take advantage of the revival post-COVID-19. In Vietnam, the company does not have projects to launch yet as the approval process has been slow.

Strong Margins for O&M Segment in 1Q20

• Strong margins for O&M segment in 1Q20 but downside risks remain. The offshore & marine (O&M) segment achieved a 5% gross profit margin in 1Q20 which was one of the best since 1Q18; however, we note Keppel Corp’s management highlighted near-term challenges in this segment, given the significantly reduced labour force at its Singapore shipyards; thus, margins may trend down over the next couple of quarters in our view.

Subsidiary Divests Small Stake in Keppel DC REIT

• On 28 Apr 20, Keppel Corp announced that its wholly-owned subsidiary Keppel T&T had divested a 2.33% stake in Keppel DC REIT (SGX:AJBU) for S$91.96m resulting in a gain of about S$46m when the deal is completed on 30 Apr 20; this impact will therefore only be felt in 2Q20.
• Keppel Corp stated that it was an opportune move to realise profits, and that the funds will be “redeployed to capture new opportunities”. Keppel T&T remains a sponsor of the REIT and will continue to hold a 20.58% stake in Keppel DC REIT.

Investments Division Recorded a Net Loss of S$52m

• On the negative side, the investments division recorded a net loss of S$52m due to the recognition of mark-to-market losses on funds as well as direct stakes in companies, and losses from Keppel Corp’s hospitality assets which have been negatively impacted by COVID-19 travel restrictions.

Downgrading Earnings Forecasts

• We have lowered our net profit estimates for 2020 and 2021 by 22% and 14% respectively as we have factored in lower gross profit margins for the O&M (5% previously to 3%) and property segments (38% previously to 30%) due to the effects of the COVID-19 pandemic.
• We retain our BUY rating on Keppel Corp with a target price of S$7.15 based on a SOTP-valuation methodology.
• In our view, Temasek’s partial offer for Keppel Corp at S$7.35 remains valid and is unlikely to be rescinded in our view. Keppel Corp’s management stated that in relation to the offer, there were no material adverse changes to its financials in 1Q20.

Inexpensive Based on PE and P/B Valuation Multiples

• Keppel Corp’s current one-year forward PE of 12.3x appears inexpensive as it is 14% below its 5-year average of 14.3x. In addition, the company’s one-year forward P/B multiple of 0.92x is -1SD below its 10-year historical average of 1.45x.

Source: UOB Kay Hian Research - 30 Apr 2020