Have investors found a keeper in Keppel?

SINGAPORE (July 22): Keppel Corporation, the conglomerate with four core businesses comprising property, offshore & marine, infrastructure and investments, reported a 39% decline in 2Q19 earnings to $153 million from a year ago.

See: Keppel posts 39% fall in 2Q earnings to $153 mil on absence of en bloc property sales

So, will Keppel see a better third quarter and second half?

In 2Q19, Keppel’s property division posted a PBT of $161 million, down 38% from a year ago.

This was due mainly to the absence of gains from en-bloc sales of development projects which was recorded in 2Q18.

However, Keppel is well positioned to benefit from the improving property market in China, say analysts.

DBS Group Research’s Ho Pei Hwa says Keppel’s huge land bank of some 5 million sqm in China is held at low cost.

Half of the land bank is under development, progressively unlocking its RNAV over the next three to five years.

Of its remaining undeveloped land bank, 30% is for projects in Tianjin Eco-city. The land was acquired in 2009 at less than one-tenth of the current land price, which has yet to be factored in DBS’s RNAV.

Over 2H19 to 2022, Keppel has also forecast $2.9 billion in earnings from the sale of its overseas homes, recalls UOB KayHian.

Meanwhile, Keppel’s O&M division looks to be on the cusp of recovery, although this is expected to happen slowly.

Revenue for 2Q19 fell 21% to $481 million, mainly due to the absence of revenue from sale of jackup rigs to Borr Drilling which was recorded in 2Q18. However, the division recorded pre-tax profit of $4 million, an improvement from the $11 million pre-tax loss a year ago.

Management says it is starting to see increase in workflow and is looking to add workforce in preparation for the upturn. This will be the first hirings since its rightsizing exercise in 2014.

Year to date, the $1.9 billion in new orders won have already exceeded that of the whole of 2018 which saw $1.7 billion in orders.

DBS says the pace of recovery should gather momentum, given sustainable oil prices above US$60/bbl and rising offshore capex.

There was also solid contribution from Keppel’s infrastructure division which saw a 12.2% increase in revenue to $726 million. This was the result of higher sales in the power and gas businesses as well as progressive revenue recognition from the Hong Kong Integrated Waste Management Facility project.

In 2Q19, net profit from the infrastructure division nearly tripled to $43 million from $16 million in 1Q19 although this was partly dragged down by share of Keppel Infrastructure Trust’s cost for the $7 million acquisition of Ixom.

Finally, profit from its investment division more than doubled to $25 million in 1H19, thanks to re-measurement gains of previously held interest in M1, higher contribution from M1, and higher income from Keppel Capital.

DBS has a “buy” on Keppel with a lower target price of $8.50 implying 1.3 times FY19F book value in view of the slow oil & gas recovery.

RHB Research has a “buy” with $7.30 target price although upside risks could come from the property division seeing stronger numbers in 2H19.

UOB has a “buy” with a target price of $7.61 with both the infrastructure and property business segments facing robust revenue and business outlooks.

KGI is the only research house to maintain its “neutral” with $7.44 target given the weak macro outlook and lack of short-term catalysts.

As at 4.24pm, shares in Keppel are down 9 cents at $6.48.