SINGAPORE (July 21): UOB Kay Hian and CIMB Research are keeping Keppel Corporation at “hold”, even as the conglomerate struggles to weather the protracted storm facing its offshore & marine (O&M) segment.
“The contracting outlook for the O&M division remains moribund,” says UOB lead analyst Foo Zhi Wei in a Friday report.
Dragged by lower O&M revenue, Keppel saw its earnings tumble 22.1% to $160.3 million for the second quarter ended June.
Revenue from its O&M division fell 38% to $449 million, while pre-tax profit for the segment plunged 91% to $8 million. This was due to lower operating results as a result of lower revenue, higher net interest expense, and lower share of profits of associated companies.
See: Keppel Corp 2Q earnings sink 22% to $160.3 mil on lower offshore & marine contributions
“Bottom-line could have been worse, if not for the sale of fixed assets [amounting to] $17.1 million, which we understand to mostly comprise of yard fixed assets from the O&M division,” says Foo.
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CIMB lead analyst Lim Siew Khee says Keppel’s O&M results were propped up by sale of assets. “Looking ahead, there could be more asset sales from mothballing exercises to cover the division’s interest expense of close to $40 million per quarter,” she adds.
Amid the prolonged O&M weakness, Lim says Keppel is “increasingly being viewed as a property developer proxy.”
Net profit from Keppel’s property division held steady at $96.6 million in 2Q, with revenue growing 15.7% y-o-y to $542.2 million.
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“Property remained steady from stronger sales in Singapore and completion in China,” says Lim.
Lim says that Keppel is confident of the complete sale of the Singapore properties – The Glades and Highline Residence – before its ABSD deadline. It is also not in a hurry to bid aggressively on new sites given its ample landbank as well as redevelopment potential in Keppel Towers.
At the same time, UOB’s Foo points out that, from 3Q17 to 2019, Keppel is expected to progressively recognise profit from the sale of some 5,860 units of overseas homes sold.
In addition, Foo says Keppel’s asset management arm, Keppel Capital, is looking to double its $25 billion of assets under management (AUM) in the next five years in a “growing shift towards developing Keppel as an asset manager.”
“This will be achieved through its O&M, Infrastructure, Data Center and Property verticals, where Keppel has expertise to create and develop these asset classes and manage them,” he adds.
CIMB is keeping its target price of $7.24 for Keppel Corp, while UOB is raising its target price to $6.86, from $6.55 previously. Additionally, UOB recommends an entry price of $6.20.
As at 1.23pm, shares of Keppel Corp are trading 5 cents higher at $6.58.
