Although Keppel reaped a S$660m gain on the sale of SPC, its overall exceptional gain amounted to S$421.5m. The SPC gain was offset by losses on disposal of investments of around S$46.0m, as well as impairment of assets worth S$189.1m, the lion’s share of which were recorded in the infrastructure division.
We understand that the infrastructure impairment was taken on its Singapore operations, and presumably on its 500MW power plant on Jurong Island, where lower electricity tariffs are yielding return on assets that are below expectations – hence the impairment. The broader division saw a 7% sequential drop in sales to S$587.9m, while EBITDA fell from S$45.6m to $31.9m.
Also disappointing was that Keppel did not declare any special dividend despite the extraordinary gain. However, interim dividend rose to 15cts per share from 14cts in 1H08, in line with core earnings improvement. Keppel may consider a larger payout at year-end. For now, it rather retain cash for potential M&As, and to offset the cash outflow of converting O&M deposits to sales, with very few new orders to replenish this cash.
We are adjusting our FY09 forecast down by 4% to account for impairments and lower infrastructure earnings, while raising O&M on higher margins. We are also cutting our FY10 and FY11 forecasts by 5% and 9% respectively – barring new order flows, O&M will go through most of its current orderbook of S$7.7bn within the next 4 quarters, and 3-yr core earnings CAGR stands at -14% p.a to 2011. Our Sum of the Parts value of S$7.77 remains unchanged. We are still factoring a special dividend of 20 cts per share at year-end, and together with a 15cts interim and a further final 15cts ordinary, FY09 yield forecast stands at 6.4%.
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