Sluggish H115 on offshore headwinds, Doha losses
Results vs expectations
H115 net profit of S$757m was 46% of our original full year estimate. Earnings from the Offshore division were below our forecasts but sentiment on this sector is weak so this is not a surprise. We also anticipated the ~S$250m gains recorded from the combination of KIT and CIT, and the sale of Keppel's cogen to its trust, as the transactions were completed in the quarter. However, we did not expect further provisions at the Doha waste project, which amounted to about S$200m. We have cut our 2015/2016E group net profit ests by 9.5%/9.6%, mostly to reflect weak offshore revenue and margin prospects.
Offshore: H115 revenue/ net profit was 43%/38% of our prior 2015E forecasts
EBIT margins were 12.3% (13% after adjusting for one-off costs) in Q215, 237bps lower YOY. In our view this miss should not be a rude shock to the market, given ongoing industry headwinds. Lower revenue (thus weaker margins due to operating leverage) is explained by Kep's slower construction pace at Brazil, as well as push back in delivery dates requested by a few clients. At Brazil, negotiations with Sete Brasil are still ongoing on matters such as pricing, payment terms, delivery dates of the 6 semi units. Keppel indicated that these contracts had swung to negative cash flow situation at the end of Q215. We estimate that if Kep were to fund the construction of the Sete Brasil rigs using its balance sheet, and receive payments only upon delivery of each rig, this would raise its net gearing by ~10% pts.
Outlook for the stock
Valuations are not aggressive in our view, we estimate that the stock trades at around 34% discount to its sum of parts. However, we believe that positive share price catalysts might be subdued in the near term. We view positively Kep's decision to maintain its interim DPS at S$0.12 despite the challenging operating environment.
Valuation: Price target based on 25% discount to Sum of Parts
We value the listed entities at market price, impute Keppel Land at an RNAV of S$5. We value offshore on DCF, assuming peak earnings in 2014