Keppel

Keppel: Does it need cash?

Bloomberg news suggests that Keppel might sell its 19% stake in m1 and 45% stake in Keppel REIT, worth $1.6b combined; or a rights issue. Separately, Keppel is selling its stake in Fernland Investment which owns a Vietnam office building for US$10.9m.

This raises the question if Keppel needs cash? The O&M is not so cash-generative anymore. It used to be the cash cow with most of its earnings upstreamed to the group to fund dividends and other businesses. This explains its stagnant NAV since FY12. But its FY15 NAV shrank from $2.3b in FY14 to $1.4b, despite PATMI of $481m.

This suggests considerable net cash outflows to the group, likely for taking KepLand private and dividend payments. Cash generation was also hampered by backend-loaded rig payments and delayed deliveries. It is highly possible that O&M does not have much cash left to support its working capital in FY16, unless clients pay up.

Maybank-KE cites that the KepLand privatisation was a big cash drain. The house thinks that a large portion of the group’s SGD1.9b cash as at end-FY15 may be residing in its property arm, and cannot verify if this could be readily available to O&M, given 1) some may be proceeds from property presales; and/or 2) the cash may not be in Singapore. Greater clarity may emerge when the company releases its annual report.

According to Maybank-KE estimates, Keppel may already face a cash deficit in FY15 before dividend payments, if it does not touch the cash deposited in its property subsidiaries.

Unless rig clients pay up, it may need to consider other cash sources, to which the house does not rule out debt or equity fund-raising, asset sales or capital recycling.

Maybank-KE maintains Sell on Keppel Corp with TP of $4.24