Keppel Corporation - CGS-CIMB Research 2020-09-30: Rewarding Focus; Expect To See Accelerated Efforts In Selling Assets


Keppel Corporation - Rewarding Focus

  • In its 3-year plan to unlock S$3bn-5bn of assets, we expect to see accelerated efforts in selling landbank /commercial buildings.
  • Keppel Corp is also embarking in O&M strategic review which could lead to it scaling down its operations to focus on renewable energy or complete exit O&M in the next 1 year.
  • Longer-term ROE of 15% remains. Reiterate ADD and S$6.46 Target Price.
  • Divestment of its O&M unit above end-1H20 book value of S$1.77bn could be a catalyst.

Targeting the low hanging fruit first

  • Keppel Corporation (SGX:BN4) has identified a group of assets worth S$17.5bn to monetise over time; specifically, S$3bn-5bn will be carried out in the next three years. Among the assets under review, S$7bn will be from land bank and some projects under development carried at cost; S$4.8bn through REITs; S$3.9bn of non-core assets (including Keppel O&M’s rigs) and S$1.8bn funds/investments.
  • We believe monetisation plans could include landbank sale and injection of Singapore commercial properties into REITS. Although this has been part and parcel of its previous asset recycling strategy, setting a hard target of S$3bn-5bn makes the difference this time.
  • We think some of the other low hanging fruit could include paring down its stakes in REITS to 15-20%, the optimal level of interest, in its view. This could mean lower stakes in Keppel REIT (SGX:K71U) (currently: 44.31%) and Keppel DC REIT (SGX:AJBU) (currently 21.29%).

Strategic review of O&M to complete in less than a year

  • Keppel Corp is also commencing a strategic review (organic and inorganic) of its offshore & marine (O&M) business; this is not part of the S$3bn-5bn asset disposal. Organic options include reviewing the unit's strategy and business model, assessing current capacity and global network of yards, and restructuring to focus as a developer of renewable energy (RE) assets (e.g. wind power).
  • Being a developer of renewable energy does not require an operating yard but can be executed via partnerships. Inorganic options include strategic mergers and disposals. We do not rule out a merger of its O&M business with Sembcorp Marine (SGX:S51).
  • Had the Temasek deal gone through, we believe the eventual outcome to streamline its O&M unit would have been on the cards. If there is no M&A deal, we think Keppel Corp could look to sell at least six of its stranded rig-building contracts, fetching S$1.5bn-1.6bn.

Why review now?

  • We believe the strategic review of Keppel Corp's O&M business could be spurred by recent weakness in share price due to lapsed offer from Temasek in Aug. At current valuation, Keppel Corp is trading at a new trough of 0.7x CY20F P/BV, lower than during the past oil crisis (0.82x P/BV in Jan 2016) and Global Financial Crisis (GFC; 1.33x P/BV in Jan 09). It also implies negative equity value for its O&M business at S$0.60 per share, which we believe is an unfairly valuation given its order book of c.S$3.5bn and proven execution track record.
  • We do not rule out a merger of its O&M business with Sembcorp Marine as after hefty impairments amounting to S$889m in 2Q20, the unit's book value had decreased to S$1.77bn as at end-Jun. However, this process could take longer given Sembcorp Marine’s stretched balance sheet.
  • In the meantime, we believe Keppel Corp could be actively looking for buyers for the undelivered (stranded) rig-building contracts including five jack-up rigs and one Cando drillship. We estimate the market value to be about S$1.5bn-1.6bn conservatively for these rigs.

What are the low hanging fruit?

  • We believe the low hanging fruit is paring down its stakes in REITs to 15-20%, the optimal level of interest, in its view. This could mean lower stakes in Keppel REIT (currently: 44.31%) and Keppel DC REIT (currently 21.29%). These exercise could lead to revaluation gain, boosting its bottomline.
  • Recall that Keppel Corp recognised mark-to-market (MTM) gain of S$131m from reclassifying Keppel Infra Trust (SGX:A7RU) from an associate to investment in 1Q20.
  • We believe divestment of commercial buildings including Keppel GE Tower, Keppel Bay, and I12 Katong into REITs could also be possible.

What next after review?

  • Keppel Corp will reinvest the proceeds of the asset monetisation in data centres, environmental solution, renewable energy, integrated urban development, and asset management. This forms the core of its 2030 vision of providing solutions for sustainable urbanisation with focus on energy (renewable/wind) & environment (infrastructure), urban development (land), connectivity (M1), and asset management (Keppel Capital).

Maintain ADD on Keppel Corp with SOP-based Target Price of S$6.46, O&M undervalued

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-09-30
SGX Stock Analyst Report ADD MAINTAIN ADD 6.460 SAME 6.460