EUR 850.00 For Business Accounts Only

Morningstar | Keppel’s Robust Property Business Helps to Offset Weaknesses in Other Segments; Shares Undervalued

No-moat Keppel Corp’s net profit of SGD 809 million for the first nine months of 2018, up 18% year over year, was below our expectation. Recovery in the offshore and marine, or O&M, segment remains slow, albeit partly mitigated by resilient earnings from the property division. We lower our fair value estimate to SGD 8.20 from SGD 8.50 to incorporate the weaker-than-expected order wins. Nonetheless, we believe the firm remains attractive, given its diversified business and healthy fundamentals.

The property segment remains the key earnings pillar and contributed 95% of Keppel’s total net profit, supported by disposal and fair value gains despite lower contribution from property trading in Singapore, China, and Vietnam. Earnings from the sale of 7,240 units of overseas homes will be recognized upon completion from fourth-quarter 2018 until 2022. In addition, the sales pipeline is sustainable, with about 15,000 units of launch ready homes from now until year-end 2020. While China’s real estate market is affected by cooling measures, Keppel has decided to venture into Nanjing, given the favorable supply and demand situation. We remain comfortable with the firm's strategy, given its track record in developing profitable projects and recycling assets for higher returns. Meanwhile, the latest restrictions in Singapore's residential market on average development unit size should have limited impact on Keppel, given its relatively small exposure.

Keppel’s O&M segment reported a net loss of SGD 38 million, versus net profit of SGD 11 million over the year-ago period, owing to lower work volume and losses from associated companies. Although third quarter net profit improved to SGD 2 million, this was partly aided by one-off interest income. The firm has won new orders worth SGD 1.4 billion year to date (compared with SGD 1.2 billion for full-year 2017), which is below our expectations. We have cut our 2018 new contracts forecast to SGD 1.8 billion from SGD 2.8 billion.

While we think the current high oil price environment is favorable for Keppel, it is still early in the recovery phase, as the industry still needs time to digest the overcapacity in the rig market.

Earnings from the infrastructure division rose 25% year over year to SGD 121 million, largely attributable to gains related to Keppel DC REIT and higher contribution from environmental infrastructure and infrastructure services. We think earnings from this segment should remain steady, underpinned by new infrastructure projects such as the Marina East Desalination Plant and the Hong Kong Integrated Waste Management Facility.

The investment segment is making a net loss of SGD 38 million, mainly owing to losses at associates and absence of one-off gains. The firm has sold two plots of land in Tianjin Eco-City in the third quarter, but profit from only one of these has been recognized. We expect profit from the other plot of land to be recognized in the fourth quarter, which should support earnings for the division. We note that home prices have moderated in Tianjin due to cooling measures, but we think long-term prospects for Tianjin Eco-City are intact. We also see efforts by management to expand its asset classes and improve long-term earnings stability. Keppel will invest in an U.S. senior living operator and it is looking to establish a new private fund aiming to invest in preschool and early-learning real estate assets in Asia-Pacific.