■ We think Keppel Urban Solutions (KUS) could enjoy the same success as SSTEC, but on a smaller scale, with a faster turnaround time and focused on smart precincts.
■ O&M outlook is positive on sustained high oil price but we do not anticipate V-shape recovery. Operating leverage to improve on leaner operations and lower interest.
■ KEP Land is a proxy to ride the property cycle in emerging markets, with land bank for 61,000 homes, with ROE target of 12%.
■ We lift our EPS for FY18-20F by 5-10% on higher gains in property. Maintain Add and SOP-based TP at S$10.00. Catalysts are Kep O&M recovery and special DPS.
Top 3 FAQs from investors and management’s responses
1) Capital allocation: Vietnam is a key market for KEP to deploy capital efficiently as land cost is c.20% of total development costs (Singapore: 60-70%, China: 40-50%).
2) Impact of interest rates on property: management thinks this is not the main determinant of demand in property market but liquidity, employment and economic growth are key in Singapore, Vietnam and China.
3) Keppel O&M outlook and synergies to the group: Positive on recovery but for now focusing on non-drilling orders. Cross-sell opportunities within group include floating data centres.
KUS could replicate Tianjin Eco City’s success, but smarter
KUS is a horizontal master developer of ‘smart’ precincts.
The key differences between KUS and SSTEC:
1) KUS is 100%-owned,
2) KUS is targeting a smaller area of c.3km2 (SSTEC: 30km2 ), and
3) KUS targets 3-5 years for returns on investment (SSTEC: 8 years).
Saigon Sports City (0.64km2 ) is KUS’s pilot smart township (partners: Keppel Land and Microsoft). Other smart cities in the pipeline include Filinvest City in Alabang, a 2.44km2 prime property south of Metro Manila (MOU with Philippines Filinvest for urban solutions).
De-risking inventory and deleveraging in O&M sector
We expect its balance sheet and operating leverage to improve with the receipt of US$288m down payment from Borr Drilling for the recent sale of five jack-up rigs amounting to US$735m. The balance purchase price is payable on delivery of each rig (4Q19 to 4Q20), which should gradually improve operating leverage. Keppel O&M paid c.S$127m financing costs in FY17 (FY16: S$152m). YTD order win of c.S$800m includes the latest two dredgers secured from Van Oord. Our FY18F order win forecast is S$3bn.
Active asset recycling may result in upside to dividends
To date, KEP has clocked in c.S$320m of property divestment gains from the sale of Keppel Marina Zhongshan and Shenyang. With potential revaluation gains, we believe property ROE could reach 12% for FY18F (vs. CIMB: 9% and Singapore developers’ c.5%). We believe a stronger balance sheet from O&M and property could pave the way for special DPS (8-10Scts) in FY18F (commemorating 50th anniversary in 2018) or dividend yield of c.4.2%, higher than conglomerate and developer peers.
KEP is our preferred pick in the capital goods sector given its clear earnings growth strategies. Catalysts include stronger-than-expected turnaround in Keppel O&M, divestment gains from asset recycling in property and higher DPS. Key risks include significantly weaker-than-expected orders at Keppel O&M and an unfavourable outcome on the court claim by EIG.
Source : CGSCIMB Research