SINGAPORE (July 25): Daiwa has maintained its “hold” call for Keppel Corp, with a target price of S$5.61. Echoing Daiwa’s rating, UOB has also reiterated its “hold” call, with a target price of S$5.70, according to reports issued by both research dated July 22.  

In 2Q16 Keppel announced revenues of S$1.63 billion, down 37% y-o-y while net profit declined 48% y-o-y to S$206 million. This fell short of both research houses’ expectations.

The decline in net profit was attributed to lower work volumes from Keppel’s O&M division as net profit fell sharply by 65% y-o-y to S$61 million and revenue fell 54% to S$720 million.

New orders for its O&M division were S$460 million, with an order backlog of $8.3billion. Even if new orders materialise in the coming quarters, operating margins on those contracts will at best be in the mid-high single-digit range, says Daiwa analyst Royston Tan.

Both research houses also note that Keppel’s property division may face earnings pressure. UOB analyst Foo Zhiwei noted that despite registering a 15% y-o-y increase in revenue in 2Q, Keppel’s earnings fell 9%. Operating margins for the unit appear to be under pressure, judging from the 4.9% y-o-y decline from 27% to 22%, notes Foo.

Daiwa also noted that while contribution from Keppel’s property division remained steady in 2Q16, it foresees slowing residential sales in the coming quarters from its core Singapore and China residential segments.

UOB also pointed out net gearing inched up to 62% as a result of increased borrowing to meet working capital requirements for its O&M unit. However, UOB”s Foo notes that with working capital requirements for the O&M unit having “plateaued”, gearing is expected to taper off in time.

Both research houses also noted that Keppel’s declared interim of 8 cents represents a decline of 33%, as compared to the prior period. UOB believes that this may indicate a strain on the group’s cash flow.  

Looking ahead, UOB’s Foo notes that demand for new drilling rigs “will not return soon” with recovery expected to be earliest 2020. Foo says that while Keppel is diversifying into other product classes, contracts values are not likely to repeat those seen in the last rig construction boom.

Moreover, Keppel has agreed to defer delivery of three jackups for Grupo R and one jackup for Parden Holdings to 2017. Given the continued deferrals, UOB believes that that Keppel may have to make allowance for impacted rig orders.

Moving forward, UOB has reduced contract win assumptions to S$1.8 billion for 2016, as well as S$2 billion each for 2017 and 2018.

The research house has also reduced Keppel’s earnings estimate for 2016 by 7% from S$1.05 billion to S$975 million, while reducing 2017 and 2018 earnings by 19% and 21% respectively. Daiwa’s Tan on the hand, expects earnings of S$987 million in 2016.

UOB also forecast a reduction in dividend payout ratio from 45% to 41%, translating to a dividend of 22 cents for 2016 at a dividend yield of 3.9%. Daiwa has also forecast a final dividend of 22 cents.

At 11.56 a.m. today, Shares of Keppel Corp are down 0.36% at S$5.48.