Keppel Corp

Keppel Corp: 1Q net profit tanked 41.5% y/y to $210.6m, making up only 17% of full year estimates.

Revenue tumbled 38.1% to $1.74b, dragged by weaker O&M sales recognition of $818m (-57.5%), due to rig deferments and suspension of Sete Brasil contracts.

This was partially cushioned by higher property revenue of $310m (+66%) on improved sales in China and Singapore, where 940 homes were sold (1Q15: 720), the bulk from China.

Infrastructure revenue fell 23% to $390m due to lower energy prices and volume, while investments revenue declined 37% to $32m.

O&M operating margin widened to 13.6% (+1.6 ppt), as the yard trimmed its global workforce by 9.4% and reduced overheads by 28%.

Notably, its working capital requirements deteriorated, leading to an operating cash outflow of $354.3m (1Q15: +$284.3m). If this persists, it might face difficulties sticking to its 40-50% dividend payout guidance.

Ytd, the O&M segment won a miniscule $190m of contracts (FY16 forecast: $1.6b) as the order flow dried up. As such, its offshore orderbook contracted to $8.6b (4Q15: $9b), which includes the ~$4b of Sete Brasil and $1b Transocean orders that were deferred till 2020. Keppel has stopped construction of Sete rigs, until it recommences payments.

Management cautions an extended slowdown in the offshore segment, and unveiled two more jackups (Clearwater & BOT Lease) and two unnamed semisubmersibles have been deferred. Maybank KE opines that the street has yet to price in further asset writedowns if current deferments turn into cancellations.

Meanwhile, strong China property sales seen in the quarter may be insufficient to shoulder the weakness in other segments. While there could be further upside to house prices in Tier-1 cities, the government has stepped in to tame the overheated Shanghai and Shenzhen markets.

In short, Maybank KE's Sell call is premised on 1) more O&M contract deferrals; 2) possible contract cancellations; 3) more provisions and 4) negative developments in Brazil. The upside risk would be a sharp and sustainable rebound in oil price, inducing drillers to order new rigs.

Keppel Corp is currently trading at 9x FY16 consensus forward P/E and ~1x P/B.

Latest broker ratings:
RHB maintains Buy with TP of $8.08
Morgan Stanley Overweight with TP of $6.80
UOB Kay Hian downgraded to Hold from Buy, cuts TP to $6.40 from $6.50
Daiwa maintains Hold with TP of $5.68
KGI upgrades to Hold from Sell, raises TP to $5.60 from $4.26
HSBC maintains Hold, increases TP to $5.34 from $5.18
JPMorgan maintains Neutral with TP of $5.30
CIMB downgrades to Reduce from Hold, cuts TP to $5.14 from $5.53
Nomura maintains Neutral with TP of $5.05
Credit Suisse maintains Underperform with TP of $5.00
Maybank KE maintains Sell with TP of $4.42
CLSA maintains Sell, cuts TP of $4.13 from $4.28