Keppel Corporation - More value unlocking actions?

HOLD for decent dividend yield and potential value-unlocking corporate actions 
Keppel remains committed on paying out 50% of its earnings to reward shareholders. Although DPS could moderate with earnings decline, yields remain fairly attractive at 5-6% based on our forecasts. Upside surprises could come from gains from disposal / divestments. In addition, infrastructure should recover with the delivery of all EPC contracts, mitigating the weakness from O&M.

Offshore & Marine business weighing the group down
Order wins in 1H15 stood at S$1.5bn, less than half of 1H14’s S$3.2bn and considerably lower than FY12 and FY13 full-year wins of ~S$10.0bn. Keppel O&M’s net orderbook is shrinking, implying declining top-line and earnings ahead. In 2Q15, Keppel O&M saw its PATMI fall 36% y-o-y and 15% q-o-q due to revenue declines of 23% y-o-y and 18% q-o-q, led by deferments in Transocean and Petrobras projects.

Property business is a mixed bag; infrastructure should bottom out
Singapore home sales remain muted, but the Chinese market seems to be picking up. YTD GFA sold across developers in China is up 24.2% over 2014’s slump, although ASP pick-up has been varied, with mainly Tier 1 cities seeing pricing gains. Overall, Keppel sold over 1,800 homes in 1H15, with 1,170 coming from China alone, marking an improvement over the 1,300 total sold in 1H14. For infrastructure, with the handover of both phases of the Greater Manchester EPC project and the Doha North sewage treatment project having incurred its final provision of just under S$200m in 2Q15, Keppel Infrastructure should see its profitability improve.

Technical Analysis
Daily Chart
Our TP of S$8.14 is based on sum-of-parts :

(1) O&M segment is valued at 10x price-to-earnings (PE) ratio on FY15 earnings,

(2) infrastructure is valued at 10x PE on FY15 earnings, and

(3) market values/estimated fair values are used for listed subsidiaries and directly-owned property projects.

Key Risks to Our View:
O&M segment could fare worse than expected. We forecast revenues from Keppel O&M falling to the ~S$6.5bn and S$6.9bn levels in FY15 and FY16 respectively, from S$8bn previously. Continued depletion of the order book coupled with deferments could pose downside to our forecast. (Read Report)

Source : DBS Group Research

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