Keppel downgraded to Reduce by Nomura on expectations of weaker second half

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Nomura downgraded Keppel Corp. to Reduce from Neutral after second-quarter earnings were “significantly weaker” than expectations and its forecast that earnings in the second half could fall as much as 50 percent from the first half.

“Given a broad-based property slowdown and considering that other three divisions cumulatively have reported lower earnings in the first half of 2018 (vs the first half of 2017), we think fundamentals have deteriorated sharply recently,” it said in a note on Friday. “Also, earnings volatility is significantly higher today with high dependence on divestment gains.”

For the first half of 2018, Keppel reported on Thursday that net profit rose 38 percent on-year to S$583 million, while revenue increased 7 percent on-year to S$2.993 billion. The property division saw its net profit climb 214 percent on-year in the first half to S$603 million, making it the largest contributor to the group, but the offshore & marine division posted a net loss of S$40 million and the investment division swung to a net loss of S$46 million. The infrastructure division’s net profit for the first half rose 16 percent on-year to S$66 million.

Nomura said that core recurring earnings in the second quarter were “significantly weaker” than its expectations, with two out of four divisions reporting a net loss.

It also pointed to concerns about earnings in the property division, where Keppel got the bulk of its earnings in the first half.

Nomura estimated that core property earnings, excluding divestment gains, were slowing.

“Home sales decline is broad-based now – across Singapore, China and Vietnam,” it said. “Earnings performance recently has been boosted by the capital recycling strategy, which works well in a rising property price environment but could face challenges amid property cooling measures.”

In early July, Singapore’s government announced a fresh round of cooling measures for the property market, targeting the additional buyer’s stamp duty (ABSD) and loan-to-value limits. The surprise measures set off a selloff in property stocks and banks.

Nomura said it expected second-half earnings could fall 35 percent to 50 percent from the first half’s level as the bulk of divestment gains had already been booked.

It cut its target price to S$5.90 from S$7.50 after lowering 2018-19 earnings forecasts by 7-10 percent, mainly on the investment division outlook.

The stock is up 1.44 percent at S$7.06 at 10:21 A.M. SGT.

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