Keppel Corporation - 3Q15 mixed as O&M weakness offset by Property strength

Keppel reported 9M15 net profit of S$1.12 bn, representing 77% of consensus FY15 forecast. O&M net profit declined to S$166 mn in 3Q15 from S$173 mn, as revenue fell to S$1.41 bn in 3Q15 from S$1.58 bn in 2Q15 with pushback in rig deliveries. O&M operating margin remained unchanged QoQ at 12.3% in 3Q15.

Following the sale of a 51% stake in Keppel Merlimau Cogen, Infrastructure net profit fell to S$34 mn in 3Q15 from S$38 mn in 3Q14 despite a S$24 mn pre-tax gain on writeback of impairment relating to Senoko WTE plant.

Property PATMI increased to S$144 mn in 3Q15 from S$117 mn in 2Q15, driven by increased profit recognition in China. With a relaxation of cooling measures, Keppel Land sales in China increased to about 1,070 units in 3Q15 from 860 units in 2Q15.

Net gearing increased to 0.52x in 3Q15 from 0.42x in 2Q15, driven by working capital outflow in the O&M division. We lower our target price to S$8.20, based on SOTP valuing the O&M business at 9x 2016E P/E, and reduce our 2015-17E EPS by 1- 5%. Maintain NEUTRAL.

O&M margin remains stable at 12.3% in 3Q15
Keppel reported 3Q15 net profit of S$363 mn, representing 25% of consensus FY15 net profit expectations. O&M revenue declined from $1.58 bn in 2Q15 to S$1.41 bn in 3Q15, while margin remained steady at 12.3% in 3Q15. The lower revenue was due to reduced workload, due to a slowdown in the construction of Sete Brasil semisubs, as well as a pushback in the delivery of jackups. Keppel will be delivering six jackups in 4Q15 for Grupo R, Falcon Energy, Energy Arabian Drilling Co and Perforadora Central. There is a deferment in the delivery of three jackups by about three months to early 2016, including two for Grupo R and one for Parden Holdings. With restructuring of Sete Brasil ongoing, management expects at least a 10-month delay in delivery of semisubs. Progress of Keppel's first FLNG conversion is on track, and Golar has initiated talks with Keppel for the fourth conversion for delivery in early 2019. To be prepared for a prolonged downturn, Keppel is reducing overheads and has reduced direct and subcontract labour by 12% and 19%, respectively.

Lower Infrastructure profit following sale of KMC Infrastructure
3Q15 net profit of S$34 mn was below 3Q14 net profit of S$38 mn despite a S$24 mn pre-tax gain on writeback of impairment relating to Senoko WTE plant following a reduction in stake in Keppel Infrastructure Trust. Excluding the gain, 3Q15 PBT of S$19 mn would be below 2Q 15 underlying PBT of S$30 mn and 3Q14 PBT of S$54 mn, following sale of a 51% stake in Keppel Merlimau Cogen. Keppel expects the Doha North project to achieve significant completion in 2015, in line with the previous guidance.

Technical Analysis
Daily Chart
Strong property sales in China and Vietnam
Property PATMI increased to S$144 mn in 3Q15 from S$117 mn in 2Q15, due to increased profit contribution from China. Keppel Land sold about 1,330 units in 3Q15, an increase from 1,080 units in 2Q15. China sales remained strong with about 1,070 units in 3Q15, an increase from 860 units in 2Q15, driven mainly by a relaxation of property measures. Vietnam sales were also strong with 150 units sold in 3Q15, exceeding total of 134 units in 9M14. Management was positive on the outlook on residential sales in China, driven by lower interest rates and pent-up demand. Singapore residential sales remained weak at 55 units in 3Q15, vs 70 units in 2Q15. (Read Report)

Read Related Reports
1) Keppel Corporation - Upside capped‏ by CIMB Research, published on 23 October 2015

2) Keppel Corporation - Benefits of diversification by DBS Group Research, published on 23 October 2015

3) Keppel Corporation - Land Ahoy! Moving closer towards land by KGI Fraser Research, published on 23 October 2015

4) Idea Of the Day - Keppel Corporation by Lim & Tan Research, published on 23 October 2015

5) Keppel Corporation - Support from 6% yield‏ by Maybank Kim Eng Research, published on 23 October 2015

6) Keppel Corporation - Supported by property‏ by OCBC Investment Research, published on 23 October 2015

7) Keppel Corp - Island Of Calm by RHB Research, published on 23 October 2015

8) Keppel Corp Ltd - Cloudy O&M prospects but decent property sales; 3Q15 gearing rises by Deutsche Bank Markets Research, published on 22 October 2015

9) Keppel Corp - Staying afloat with a multi-business strategy by Daiwa Capital Markets, published on 22 October 2015

Source : Credit Suisse Asia Pacific Equity Research

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