Highlights

Simons Trading Research

Author: simonsg   |   Latest post: Fri, 14 Feb 2020, 9:50 AM

 

Keppel Corporation - Looking at a Bright Future

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  • Keppel Corporation reported a 25% y-o-y decline in net profit to S$707m due to the high-base effect in 2018 that was boosted by lumpy divestments and enbloc sales.
  • Looking ahead, the outlook for the company’s business divisions appears robust - property sales should continue its growth trajectory and we expect offshore & marine to continue its new order win success from 2019.
  • We increase our earnings estimates for 2020 and 2021 by 11% and 8% respectively.
  • Maintain BUY with a higher target price.

Mixed Set of Results

  • KEPPEL CORPORATION (SGX:BN4) reported 4Q19 net profit of S$57m, up 42% y-o-y and beating our estimates due to lower impairment provisions, and higher fair value gains on investment properties and consolidation of M1’s results.
  • On a full-year basis, the company reported a net profit of S$707m, down 25% y-o-y as a result of higher interest expenses, lower profits from associates and also the negative effect of implementing SFRS(I) 16 regarding leases.

Property segment continues to hum along

  • Keppel Corporation stated that it expects to build upon the S$3.2b in revenue (+16% y-o-y) from home sales in 2019. Despite the slowdown in China, it stated that demand continues to be “healthy” for its products as sales increased by 50% y-o-y to S$2.2b while Vietnam has remained stable. In 2020, Keppel Corporation expects to launch 19 Nassim and potentially Plot 4 at Keppel Bay, depending on market conditions.
  • Currently Keppel Corporation has a total residential landbank of 45,200 homes with over 17,400 homes in key Asian cities which will be launch-ready between 2020 and 2022. Given the company’s 2019 sales volume of 5,150 homes, this translates to nine years’ worth of landbank.

Stock Impact

  • Offshore & marine - Outlook appears good. It is notable that the company will continue to increase headcount in 2020 by a further 1,500 direct employees after adding 2,800 over the course of 2019. Keppel Corporation commented that this is in anticipation of new orders that they have bid for as well as to fulfil the current jobs that they have on hand. To recap, the company won nearly S$2b in orders in 2019, and we forecast that it will win a further S$2b in 2020; the company commented that the current spate of new-order enquiries have been higher than that in 2019 and 2018.
  • The infrastructure division should continue its growth given that the Keppel Marina East Desalination Plant is close to completion and is scheduled to commence operations in 1H20 post testing and commissioning. In 2019, this division recorded an 8% y-o-y increase in operating profit to S$114m and we forecast that it will grow a further 10% y-o-y in 2020 to S$125m.
  • Although small at present, the investments division had a meaningful turnaround, going from a loss of S$54m in 2018 to a profit of S$11m in 2019. The profit would have been higher if not for an S$18m impairment charge related to KrisEnergy (SGX:SK3) – the company has now written down its equity and warrants to zero while its S$74m holding of zero-coupon bonds (due 2024) remains. Going forwards, the growth of this division will be underpinned by M1 and the expansion of Keppel Capital’s fund management business with a new Keppel Asia Infrastructure Fund expected to launch this year.
  • Balance sheet appears stretched at present with net gearing as at end-19 of 0.85x, although this has declined from the 0.88x as at end-Sep 19. We anticipate that the company will continue to deleverage during the course of 2020 given our forecast free cash flow of over S$900m. This may be somewhat offset by the capex that M1 will need to incur from its joint 5G bid together with StarHub (SGX:CC3). During the analyst briefing, the company stated that it was too early to provide a capex estimate to the market.
  • The company has declared a final dividend of $0.12/share (2H18: $0.15/share) which, together with the interim dividend of $0.08/share, results in a full-year DPS of $0.20, or a payout ratio of 51.4%.

Earnings Revision / Risk

  • We raise our 2020 and 2021 net profit forecasts by 11% and 8% respectively to take into account higher revenue contribution from the infrastructure division, Keppel Capital and M1.
  • Risk: Keppel Corporation has 170 staff in Wuhan. However it does not expect its business to be materially affected by the coronavirus.

Valuation / Recommendation

  • We re-iterate our BUY recommendation and raise our SOTP-based target price. Keppel Corporation’s current one-year forward PE of 12.8x based on our 2020 forecast appears inexpensive as it is 12% below its 5-year average of 14.5x. In addition, the company’s 1-year forward P/B multiple of 1.0x is more than 1SD below its 10-year historical average of 1.5x.
  • Since the announcement of the Temasek partial offer, Keppel Corporation’s share price has traded around the S$6.80 mark.

Share Price Catalyst

  • Inorganic and earnings-accretive acquisitions in the property space in China and Vietnam.
  • New order wins for the offshore & marine segment.

Source: UOB Kay Hian Research - 24 Jan 2020

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