Keppel

Keppel: (S$4.96) 4Q15 earnings shored by property; warns of a long offshore winter
Keppel Corp's 4Q14 net profit slumped 44.2% y/y to $404.8m, bringing FY15 earnings to $1.5b, which still beat lowered estimates amid the rig downcycle.

For the quarter, revenue sank 36.8% to $2.5b on weaker contributions across the board.

Offshore & Marine - Slipped into a 4Q15 net loss of $61m (4Q14: $287m profit) due mainly to a $230m provision for its Sete Brasil rig contracts. Eight of 15 planned deliveries for 2015 were pushed to 2016.

On the bright side, operating margin (sans Sete Brazil projects) came up to 17.1% but this was a likely one-off due to project mix.

Order book shrank to $9b (-28% y/y, -10% q/q) and the group laid off 17% (direct) and 24% (subcontract) of its workforce in 2015 to right-size its business and warns of a long winter.

Property - 4Q15 earnings surged 41% to $368m following the privatisation of Keppel Land, strong overseas sales and buttressed by $128.9m revaluation gains on investment properties and data centres.

Despite headwinds, it sold 4,570 homes in 2015, double the units taken up the previous year, of which 72% were in China and 20% in Vietnam. These two markets continue to be the growth drivers for the group.

Infrastructure - Contributions tumbled 78.1% to $47m, mainly due to the absence of divestment gains (4Q14: Keppel DC REIT IPO and sale of Keppel FMO), and lower revenue from its power and gas business, partly offset by fair value gains on data centres.

While the division has been dogged by EPC projects, it remains confident of development Keppel DC REIT into a strategic contributor to its overall business. Keppel Seghers has also handed the Doha North Sewerage Treatment Works in Qatar and begun its 10-year operations and maintenance phase.

Net gearing shot up to 0.53x from 0.32x a year ago as it undertook debt to acquire Keppel Land, office buildings in London, and Keppel Bay Tower.

Going forward, Maybanke-KE feels that key investor concerns have not be alleviated despite the $230m provision for Sete Brasil contracts and earlier payments of US$1.3b. In the event of a Sete Brasil bankruptcy and any order cancellations by other rig owners, the house believes more writedowns will be necessary.

Meanwhile, Sete Brazil held its shareholder meeting yesterday, which failed to obtain a 85% majority for a bankruptcy motion due to objections from Petrobras Pension Fund (18% stake) and Bank Santander (6%). A further meeting will be held In 30 days to discuss the matter, giving all parties some temporary respite.

Investors may also want to watch if clients take delivery of four deferred jackup rigs (3 for Grupo, 1 for Falcon Energy) in mid-Feb and 1H16.

Given the fluid Sete Brazil situation and dim prospects for the offshore oil industry in the near term, the group has slashed it final DPS to $0.22 based on a reduced 40% payout ratio. This takes its full year DPS to $0.34 (FY14: $0.48), translating to a fairly attractive dividend yield of 6.9%.

The stock is currently trading at a FY15 P/E of 5.9x and P/B of 0.8x, closer to its valuation lows during the 1998 regional financial crisis (P/E: 5.3x, P/B: 0.3x)

Latest broker ratings:
Maybank-KE maintains Sell with TP of $4.24
KGI downgrades to Sell, cuts TP to $4.26 from $7.16
CLSA maintains Sell, cuts TP to $4.28 from $4.92
CIMB maintains Hold but cuts TP to $ 4.39 from $7.12
Credit Suisse maintains Neutral but cuts TP to $5.10 from $7.50