Keppel

Keppel: CLSA asks if the dividend should be cut.

If oil remains at the current level, the impact to group profit and cashflow could eclipse the previous downturns Keppel faced in the 1980s and 1990s. The key difference now is the orderbook success Keppel achieved during the recent cycle as it gained significant market share. The enlarged orderbook is showing signs of cracks with heightened risks for default, provision and working capital to accommodate delivery delays, these are aspects that CLSA thinks are not fully priced in yet.

The house thinks that the payout ratio will fall from 64% in 2014 to 40%/30% in FY15/16. Keppel might be able to maintain a payout ratio through divestments but it is unlikely to be sustainable. The increase in net gearing from 11% in 2014 to above 50% in 15-16CL also signals a stretched balance sheet.

On how low can it go, a 1x P/B valuation would imply $4.30, but ascribing 8x P/E to the O&M business, SOTP valuation can go as low as $3.60.

The house maintains Sell with TP of $4.92. Details on Sete Brasil’s outstanding payment, and potential delivery delays or cancellations from other customers will help provide more clarity on Keppel’s risk/reward.