Keppel Corporation - CGS-CIMB Research 2020-05-28: The Next Lap For Long-Term Growth

SGinvestors.io

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - The Next Lap For Long-Term Growth

• In its Vision 2030 plan, Keppel Corp (SGX:BN4) keeps its long-term 15% ROE target, focusing on sustainability, asset-light businesses that are scalable, moving away from oil.
• Segments are reshuffled into
  1. Energy & Environment,
  2. Urban Development,
  3. Connectivity, and
  4. Asset Management.
• Maintain ADD call and target price of S$7.48.
• Catalyst: successful partial offer by Temasek.
• Risk: protracted global recession.

Why set vision before partial offer?

• The process of setting Vision 2030 started in 2019, prior to the partial offer launched by Temasek in Sep 2019. Together with the next generation leaders, Keppel Corp’s CEO shared the group’s Vision 2030 to drive the company’s long-term strategy and transformation. See Keppel Corp Announcements.
• The group plans to refocus its portfolio to be an integrated business, providing end-to-end solutions for sustainable urbanisation, with an asset management arm to fund the group’s growth and provide a platform for capital recycling.
• Keppel Corp's segments are reshuffled into
  1. Energy & Environment (O&M),
  2. Urban Development (Property),
  3. Connectivity (Infrastructure), and
  4. Asset Management (Investments).
• We believe the segments are likely to remain intact, even with the success of Temasek’s partial offer.

More allocation to asset management and urban development

• More capital will be allocated to asset management and urban development (more active land bank usage) and less focus on energy and environment that is heavy in capital. Long-term ROE for the group remains at 15% (ROIC: high single-digit).
• At the business segment level, Keppel Corp's targets previously set remain unchanged:
  • Offshore & marine (15%),
  • Keppel Land (12%),
  • Keppel Urban Solutions (15%),
  • Keppel Infrastructure (15%),
  • Keppel Logistics (12%),
  • Keppel Data Centres (18%),
  • M1 (25%) and
  • Keppel Capital (20%).

Focusing on returns and scalability, move away from oil

• Keppel Corp will extend its renewable focus in hydrogen, wave energy, EV charging with an intention to move away from oil related equipment. We believe Keppel Corp could be eyeing M&As for these segments instead of developing organically. Sustainability will be a key unifying focus across sectors and be a part of management’s KPI.
• In a nutshell, Keppel Corp wants to keep businesses that:
  1. have the ability to achieve targeted ROE over the long term;
  2. have potential to be meaningful contributors to the group;
  3. reinforce Keppel Corp’s ability to “hunt as a pack”; and
  4. fit the group’s sustainable urbanisation theme.
• It will also pursue strategic M&A transactions and make selective divestments to free up its balance sheet. Growing recurring income is also one of the focus areas.

Maintain ADD and SOP target price of S$7.48

• As a conglomerate, Keppel Corp has ample ammunition to gain from more capital recycling and asset re-measurement exercises. Keppel Corp is trading at c.0.95x CY20F P/BV vs. 0.8x P/BV during the 2016 oil crisis and the 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 is the partial offer by Temasek at S$7.35/share before 21 Oct 2020.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-28

SGX Stock Analyst Report ADD MAINTAIN ADD 7.480 SAME 7.480