Keppel Corporation - RHB Invest 2020-05-29: Working Towards An Integrated OneKeppel; BUY

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - Working Towards An Integrated OneKeppel; BUY

Still BUY with new SGD7.30 Target Price from SGD7.40, 22% upside and c.3% FY20F yield.
Management held an analyst teleconference to provide highlights of its Vision 2030 initiative. We are bullish on the future Keppel Corp – which is seen as a global leader in creating low-carbon smart cities – with a 15% ROE target and as a sustainable company.

Going forward, Keppel Corp (SGX:BN4) will segment its divisions into: Energy & environment (offshore & marine (O&M), infrastructure, renewable energy, and Kris Energy (SGX:SK3)), urban development (property, urban solutions, and Tianjin Eco-City), connectivity (M1, data centres, and logistics), and asset management. See Keppel Corp Announcements.

Keppel Corp’s business approach will be to pursue strategic M&A, make selective divestments to free up its balance sheet, utilise its capital recycling model, and focus on growing recurring income.
Management believes a higher percentage of recurring income will help Keppel Corp attract a better earnings multiple, which we agree. However, the recurring income target was not disclosed.

By 2030, Keppel Corp aims to allocate a higher percentage of shareholders’ funds into energy & environment and asset management.

Management sees Keppel Corp as an integrated “OneKeppel” instead of a conglomerate with different business segments. This is consistent with the “hunt as a pack” strategy. The likely outcome will be Keppel Corp being valued by the market close to SOP, in our view, with a minimal conglomerate discount.

Although the teleconference did not touch on the near-term earnings trend, we take the opportunity to cut earnings forecasts. This is because we factored in a greater impact from COVID-19, particularly for the O&M space. However, the longer-term potential is good, as management works on its Vision 2030.
Even after the earnings cut, Keppel Corp trades at an undemanding 16x FY20F P/E, falling to an attractive 12x FY21F P/E.

Keppel Corp has multiple businesses in different industries. Therefore, we use SOP to value the stock. Our SGD7.30 Target Price is based on the estimate of the O&M division, which is valued at 1.3x FY20F P/BV, ie below Sembcorp Marine (SGX:S51)’s (BUY, Target Price: SGD1.28, see report: Sembcorp Marine - RHB Invest 2020-05-13: Weak 1Q20 Business Volume, But Priced In) 5-year 1.39x average. Keppel Corp’s infrastructure segment is valued conservatively at 10x FY20F P/E, while its property arm is valued at a 40% discount to RNAV. See Fig2 in PDF report attached below for Keppel Corp's SOP valuation details.
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 partial offer by Temasek – subject to pre-conditions – offers potential for value unlocking. (See previous report: Keppel Corporation - RHB Invest 2019-10-22: Temasek Offer – Prelude For Restructuring; BUY)
In the meantime, the property division’s earnings should continue to support dividend payments.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-05-29

SGX Stock Analyst Report BUY MAINTAIN BUY 7.30 DOWN 7.400