● In O&M, Keppel sees opportunities in the production and nondrilling sectors in the near term. There are also positive signs in the rig market, with a semisub contract secured from Awilco Drilling in 1Q18. With an improving orderbook and significant fixed cost cuts, Keppel aims to lower O&M losses in coming quarters.
● Management remains confident of 12% through-cycle ROE in Property, partially driven by more active capital recycling with divestment of residential projects en bloc. Keppel also has commercial property with total GFA of 1.5 mn sq m, which can generate a net operating income of S$300 mn when stabilised.
● In a scenario where Keppel is able to achieve breakeven in O&M and 12% ROE in Property, we estimate group ROE could reach 12%. Maintain OUTPERFORM, with improving prospects across the group and dividend upside with more active capital recycling.
Increasing confidence on O&M recovery
Management of Keppel sees increasing confidence in the O&M business, underpinned by higher oil prices. As such, the company will seek out opportunities in production units and LNG-related solutions. Within the rig market, the jackup market appears to be plagued by oversupply. However, management remains confident about the longterm prospects as rig attrition is likely to lead to rebalancing in the market. In the meantime, there are positive signs in the deepwater rig market, with a contract secured from Awilco Drilling for a harsh environment semisub worth US$425 mn, in March 2018. While a decline in revenue has led to losses in 1Q18, Keppel aims to improve performance with rising revenue recognition from the recently secured contracts, as well as cost reductions that have led to a direct headcount cut from 36,200 in December 2014 to 14,000 in December 2017.
Property could achieve through-cycle ROE of 12% with more active capital recycling
Management remains confident of its through-cycle ROE target of 12% for Property, even though ROE was at about 8% in 2017. This will be partially driven by more active capital recycling, as Keppel continues to review its sizeable residential landbank for opportunities to unlock capital that will give good returns. In 2017, Keppel divested three residential projects equivalent to 4,330 units sold en bloc. Within commercial property, Keppel Land has a total commercial portfolio of 1.5 mn sq m of GFA, of which 63% is under development. When fully stabilised, the portfolio can generate an annual net operating income of about S$300 mn and can potentially be monetised through a sale or injection into a REIT. Across the residential segments, management is most positive on Vietnam and Singapore property.
Management believes there is now tighter alignment across key business units, allowing Keppel to strengthen collaboration and allocate capital towards investments that yield the best risk-adjusted returns. In 2017, Keppel launched Keppel Urban Solutions, which capitalises on the competencies across the group to develop smart cities of the future. In addition, it is developing offshore data centres and submitted a design for an offshore plant in the tender for Singapore's fourth desalination plant. (Read Report)
Source : Credit Suisse Asia Pacific Equity Research