Keppel Corporation - CGS-CIMB Research 2020-04-23: Essential Portfolios In Infrastructure

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - Essential Portfolios In Infrastructure

Keppel Corp (SGX:BN4)’s infrastructure division could be a driver this downturn with its portfolio of essential assets – power plants, data centres, waste management, etc. The division announced a S$1.5bn integrated waste management contract together with a 48%/31%/21% consortium with ST Engineering (SGX:S63) and China Harbour. See Keppel Corp Announcements.
Keppel Corp’s Tianjin Eco City also announced the first land sale in 2020 for Rmb1.174bn, for which we estimate a profit of c.S$30m.

Keppel Seghers (consortium lead), China Harbour and ST Marine were awarded the letter of acceptance by the National Environment Agency (NEA) for an engineering, procurement and construction contract worth S$1.5bn for the development of a Waste-To-Energy (WTE) facility and a Materials Recovery Facility (MRF) for Singapore’s new Tuas Nexus Integrated Waste Management Facility. See Keppel Corp Announcements.
China Harbour is one of Keppel Corp’s partners for an existing project - Hong Kong Integrated Waste Management Facility (IWMF). China Harbour will undertake the civil, structural and landscaping scope of the project, while ST Marine will be responsible for the construction of the MRF, power island and the balance of plant.

The 2,900 tonnes per day (tpd) WTE facility and 250 tpd MRF are slated to be completed in 2024. We estimate total profit of S$36m for the project (based on 5% net margin).
Keppel Corp operates a similar facility in Qatar (Domestic Solid Waste Management Centre) treating up to 2,300 tonnes of mixed solid waste for the whole country. The Hong Kong IWMF was secured in 2017 for S$5.3bn and is able to treat 3,000 tpd of mixed municipal waste.
Infrastructure consistently contributed c. S$170m of profit p.a in FY18-19 to group’s profit.

Keppel Corp’s JV Sino-Singapore Tianjin Eco-City also announced the sale of 10.86ha residential land to Tianjin developer, Sunac China Holdings, for Rmb1.174bn or Rmb7,013/sqm, which is comparable to the other land plot in the Central District sold in Aug 2019. We estimate profit from the land sale to be c.S$30m. The sale could be an indication of pent-up demand for residential properties post Covid battle in China.

Keppel Corp announces 1Q20F results on 29 Apr. We estimate net profit of S$150m (-21% q-o-q, - 26% y-o-y).
O&M should be profitable at the EBIT level prior to scaled-down activities in Mar when the cluster of Covid cases broke out at the yard. Share of losses of associates (Floatel) could be weak but we do not expect impairment. Investment division should be in the loss for lagged losses from KrisEnergy and no land sale from Tianjin Eco City during the quarter. Infrastructure division could see higher recognition of revenue from HK IWMF.
There have been no O&M contracts announced YTD and we take the opportunity to cut our expectations for 2020F to S$500m (from S$3bn) on the back of a challenging oil and gas industry. We are still hopeful of seeing some windfarm projects during the year. Note that KEP O&M clinched S$1bn during the 2016 oil crisis and S$1.7bn during the GFC.
We also factor in slower property completion of projects.

Our EPS is cut to reflect weaker O&M and property profits as we reduce O&M 2020F order win expectations to S$500m (from S$3bn) as well as deferring completion of projects. See attached PDF report for Keppel Corp's SOTP valuation details.
The stock is trading at - 0.9x FY21F P/BV, close to 0.8x P/BV during past oil crisis and below GFC’s trough of 1.33x P/BV.
See Keppel Corp Share Price; Keppel Corp Target Price; Keppel Corp Analyst Reports; Keppel Corp Dividend History; Keppel Corp Announcements; Keppel Corp Latest News.
The key catalyst/downside risk is the partial offer of Temasek at S$7.35 before 21 Oct 2020. We see the deal as critical to restructuring Keppel Corp/Sembcorp group in the looming recessionary environment.
We believe the shock in oil price drop during the offer review period (Sep 19- Oct 20) may not be construed as adverse material change (AMC).

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-23

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