Singapore rigbuilding - Dividend yield still good for KEP/SMM; 15-19% lower DPS for both yards for FY15F likely, as estimated core net profits to fall y-y

Pic Credits : maritime-executive.com
Action: Reduce Keppel Corp (KEP), and Buy Sembcorp Marine (SMM)
We maintain our Buy rating on SMM and Reduce on KEP, due to the former’s relatively better order win visibility in 2H15F, and the latter’s greater exposure to the protracted jackup rig downcycle. However, we cut our TP for SMM to SGD3.33 and for KEP to SGD6.63, mainly due to new order estimate cuts.

Dividend yield still good despite our expectation of dividend cuts
We cut our FY15/16F earnings for SMM by 5%/12%, due to factoring in of losses for associate yard in China and lower new order win forecasts. We cut our FY15/16F profits for KEP by 8%/14%, due to lower order win estimates. While KEP and SMM have been consistent in paying dividends, we think dividend cuts for both firms are likely given their y-y weaker profits. Still, we expect their strong balance sheets and continued profitability to sustain good dividend yields.

We estimate FY15F dividend yield of 4.2% for SMM, despite lower DPS
We expect SMM to pay SGD0.11 dividend per share (DPS) p.a. for FY15-16F on reduced earnings, vs SGD0.13 for FY14.

This is in line with: 
1) the SGD0.11 total DPS in FY08 when it had SGD430mn net profit, vs our forecast of SGD481mn in FY15F,

2) the lowest dividend payout since 2001 was 44% in FY09, vs 48% in FY14 and FY15F, and

3) our expectation for peak net gearing of 0.51x at end-2Q15, vs 0.23x by end-FY15F.

Indeed, SMM feedback that net debt has dipped SGD400mn in early July (net gearing of 0.39x), while we expect Sete Brasil to resume payments for drillship orders by early 4Q15F. As well, we estimate total remaining capex for the new yards in Singapore and Brazil at SGD285mn, vs SGD437mn capex in 1H15 and SGD739mn in FY14.

We forecast FY15F dividend yield of 5.2% for KEP, despite lower DPS
We expect KEP to pay SGD0.39 DPS p.a. for FY15-16F, vs SGD0.48 in FY14. This is in line with the 51% dividend payout (vs core net profit) for FY08, vs 51%/53% for FY15/16F. This is also slightly higher than the SGD0.38 total DPS in FY10 when group core net profit was SGD1.3bn, vs our estimate of SGD1.4bn for FY15F and SGD1.3bn for FY16F.

We expect total DPS to be cut, despite an unchanged interim DPS of SGD0.12, due to:
1) KEP’s need to reserve cash for its strategy to evaluate and develop longer gestation projects, and subsequently inject these projects (upon achieving regular cash flows) into associate companies for capital gains.

2) The key Offshore & Marine division is crucial to the funding of DPS historically and yet, its continued ability to do so has suffered from a severe and prolong jackup rig industry downturn.

Meanwhile, the property and infrastructure divisions remain capital-intensive. (Read Report)

Read Related Report
Singapore Offshore and Marine Sector - 2Q15 preview: We expect further consensus cuts
Monday, 20 July 2015
- Credit Suisse Asia Pacific Equity Research

Source : Nomura Global Markets Research

Labels: , ,