Keppel Corporation Limited - Which projects were deferred in Q2 and why?

Q2 revenue down 19.3%, net profit down 2.3%. DPU maintained at 12 cents.

5/8/2015 – Keppel Corporation Limited's CEO Mr Loh Chin Hua doesn't expect to see oil prices at US$100 for some time.

Addressing reporters and analysts at its Q2 results briefing, Mr Loh said the company performed 'respectably', despite global headwinds.

The company recently announced earnings for Q2 2015:

Revenue: -19.3% to S$2.56 bln
Profit: -2.3% to S$396.7 mln
One-off gains/(losses): S$273.9 mln vs Nil
Cash flow from operations: (S$555.9 mln) vs (S$305.5 mln)
Dividend: 12 cents per share vs 12 cents per share
Order book: S$11 bln as on July 23

Lower revenue was on account of a 23.4% decline in offshore & marine revenue and a 27.9% drop in infrastructure revenue, which was partially offset by a 19% rise in property revenue.

Offshore and marine revenue dropped due to a lower volume of work and deferment of some projects.

Consequently, the pre-tax profit of the offshore and marine division dropped about 36%.

Infrastructure revenue was lower due to a drop in contribution from Keppel Infrastructure's power generation plant, lower revenue from EPC projects and absence of revenue from Keppel FMO Pte Ltd which was sold in Q4 2014.

Despite that, the pre-tax profit of the division soared by 137% due to a gain from disposal of 51% interest in Keppel Merlimau Cogen Pte Ltd, a re-measurement gain from the combination of Crystal Trust and CitySpring Infrastructure Trust to form the enlarged Keppel Infrastructure Trust which was partially offset by the losses on account of finalisation of the cost to complete the Doha North Sewage Treatment Plant and a lower contribution from the power generation business.

The property division recorded a growth in revenue on the back of more units sold in China and Vietnam.

Yet, its pre-tax profit remained flat.

For the first half, Keppel Corp recorded an annualised return-on-equity of 13.1% compared to 14.3% same period last year.

The results were weaker than analysts Low Pei Han and Carey Wong at OCBC Research expected.

Keppel Corp's H1 net profit only accounts for 45% of the broker's full-year estimate.

The broker was surprised by continued poor performance from the infrastructure division, which saw significant impairments during the quarter.

The broker notes that the management believes that this will be the final round of adjustments related to the delays and cost overruns at the Doha North Sewage Treatment project.

The Infrastructure division recorded one-off gains of S$260 mln during the quarter.

The broker also notes that the company has not received any further payments from Sete Brasil since November.

Keppel Corp won the orders to build six semi-submersible units for Sete Brasil of which the first three units are 90%, 63% and 36% completed.

Keppel Corp's order wins of S$1.5 bln in the first half make up about 75% of the broker's full-year estimate.

OCBC maintains a HOLD rating on the stock but with a lower fair value of S$8.41 compared to S$9.22 previously.

Analyst Yeak Chee Keong at Maybank Kim Eng finds the underlying earnings even weaker than the headline number.

The broker estimates the company made an S$200 mln provision for delays and cost overruns related to the Doha project.

While Keppel Corp's H1 profit makes up about 49% of the broker's full-year estimate, the analyst notes that was largely due to S$202 mln gain from divestment of Keppel Merlimau Cogen.

The broker observes that Keppel Corp has turned into a marginally negative cashflow position for the Sete Brasil's six rigs order.

The company is confident of the continuation of the orders but it will go slow on construction while Sete Brasil resolves its financial issues, noted the broker.

Maybank Kim Eng has cut its order win assumption for FY15 to S$2.6 bln from S$2.9 bln earlier.

For FY16, the broker has cut the assumption sharply to S$2.8 bln from S$3.8 bln estimated previously.

The broker has also cut its FY15-17 earnings estimates by 4%-9% on account of the offshore and marine division's delivery adjustments, lower margins and a weaker order intake.

Maybank Kim Eng maintains a HOLD rating on the stock but with a revised target price of S$7.80 compared to S$8.50 previously.

The broker expects the stock to find support on account of a decent dividend yield of more than 5%, and market's preference for Keppel Corp's diversified exposure compared to that of Sembcorp Marine.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. How much has it provided for the delays and cost overruns at Doha North Sewage Treatment Works?

While we couldn't spot it in the company's earnings report, Kim Eng estimates the provision to be about S$200 mln in Q2.

Also, how much has it provided for delays and cost overruns so far?

Question

2. What factors are causing delays and cost overruns at the Doha project?

Analysts are disappointed by repeated provisions that Keppel Corp has taken due to the delays and cost overruns relating to Doha North Sewage Treatment Works.

Any reasonable investor would wonder what factors are causing such delays and consequently costing the company money.

Also, by how much have the provisions impacted the profitability of the project?

(Read the full story to get all 9 questions)

We have invited the company (keppelgroup@kepcorp.com) to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this report if we do.


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