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Morningstar | Property Division Remains the Jewel of Keppel Corp; Increasing FVE to SGD 8.50. See Updated Analyst Note from 20 Jul 2018

We believe the current weakness in no-moat Keppel’s share price, due to the perception of negative impact from Singapore’s recently introduced property cooling measures, presents an opportunity for long-term investors to accumulate the stock. The company’s underlying fundamentals remain strong, as seen in Keppel’s first-half 2018 net profit of SGD 584 million, up 38% year over year, which is driven by strong property earnings and is line with our expectations. The firm has declared an interim dividend of SGD 0.10 and a special dividend of SGD 0.05 to mark its 50th anniversary. We estimate 2018’s dividend yield to be attractive at about 4.5%. We increase our fair value estimate to SGD 8.50.

Net profit for the property segment more than tripled to SGD 603 million and was the largest contributor to the firm’s earnings. In addition to the divestment gain from Keppel China Marina Holdings Pte Ltd in the first quarter, the robust earnings were mainly underpinned by en bloc sales of development projects in China and Vietnam and fair value gain on Nassim Woods, which has been designated for redevelopment for sale, in the second quarter. Meanwhile, management acknowledges that home sales in China are affected by the government’s cooling measures but remains confident in the company’s projects due to favorable supply/demand conditions. On the other hand, Keppel will continue to monitor the impact of the new cooling measures in Singapore and explore different options for its projects. In our view, the firm's exposure to Singapore's residential market is relatively small and only accounted for less than 5.0% of the group’s launch-ready homes (in units) for 2018-20. We believe Keppel remains well diversified, given its wide geographical footprint and commercial portfolio. In addition, the firm has demonstrated its ability to develop profitable projects and recycle assets for higher returns.

For example, Keppel is looking to divest a commercial project in Beijing in the third quarter, with an expected gain of SGD 114 million.

Meanwhile, Keppel’s offshore and marine segment made a net loss of SGD 40 million compared with net profit of SGD 11 million a year ago, mainly due to lower work volume, decreased earnings from associated companies, higher taxes and the absence of divestment gains. On a positive note, while still cautious, management seems more optimistic on its outlook by citing more rig tender activities globally. That said, the rig market is still pressured by oversupply as day rates remained stagnant despite an improvement in utilization. We expect the recovery of the firm’s O&M business to be gradual. The firm has secured new contracts worth over SGD 1.2 billion as at end June (compared with SGD 1.2 billion for full-year 2017), and is on track to achieve our forecast of SGD 2.8 billion for 2018.

Earnings from the infrastructure division remain steady and grew 16% year over year to SGD 66 million, largely attributable to a dilution gain from Keppel DC REIT’s private-placement exercise and higher contributions from Environmental Infrastructure and Infrastructure Services. We expect contribution from this segment to be supported by new infrastructure projects such as Marina East Desalination Plant, or MEDP, which is close to 50% completion, and the Hong Kong Integrated Waste Management Facility, or IWMF, which is expected to recognize profit in 2019. More importantly, MEDP and IWMF will start contributing recurring income to the group from 2020 and 2024, respectively, with the commencement of the long-term operations and maintenance contracts.

On the other hand, the investment division reported a net loss of SGD 46 million in the first half due to absence of gain from sales of land parcels in the Tianjin Eco-City project, fair value loss on KrisEnergy warrants, and share of losses from associated companies. That said, we think prospects remain positive for the segment as Keppel is seeking opportunities to expand its asset classes and investor base. Furthermore, the firm expects to continue land sales of Tianjin Eco-City project in the second half to meet strong demand, and this should help to boost earnings for the division.