Keppel Corporation - CGS-CIMB Research 2021-01-28: Going Light; Restructuring O&M

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - Going Light; Restructuring O&M

Market could be neutral over Keppel Corp’s strategy of moving into an asset-light operating company (Op Co) over time, while trying to offload stranded rigs.
Keppel Corp's FY20 net loss of S$506m was wider than our S$237m forecast due to weaker-than expected O&M in 2H20 and some impairment expenses.
Reiterate ADD, with an SOP-based target price of S$6.40.
Keppel Corp's O&M restructuring efforts to take time to bear fruit. Medium-term catalyst: full exit from rig business.

We think that the market had hoped for Keppel Corporation (SGX:BN4) to fully divest its O&M, while retaining its renewable energy division from its strategic review exercise. However we note that the environment is challenging and an immediate exit may not be feasible.
We take comfort that Keppel Corp will exit offshore rig building, after completing the existing rigs, and progressively exit low value-add repairs.
Keppel Corp reiterated that an inorganic option is still on the table (i.e. merger/full divestment). Keppel T&T’s logistic is likely to remain in albeit at a reduced stake, to ride on the e-commerce demand.

See Keppel Corp's announcements. Keppel’s O&M will be restructured into three parts, and transient entities will be created to hold legacy completed and uncompleted rigs worth S$2.9bn.
- Rig Co comprises completed rigs, which will be chartered out or sold. The near-term outlook for rig chartering/ sale is still tough, and it could take a year or so to see meaningful recovery, depending on the oil price trend.
- Development Co will focus on completing the uncompleted rigs — mainly three semi-subs for Awilco and Sete Brasil and five jack-ups for Borr Drilling. The Development Co will be wound up eventually.
- Operating Co is the future of KEP O&M, focusing on floating infrastructure and infrastructure-like projects that can deliver predictable streams of cashflow, including renewables projects.
See PDF report attached below for more details on the 3 entities.
With S$1bn of order wins in 2020, Keppel's O&M orderbook stood at S$3.3b as at end-2020, with ~80% in gas solutions and renewables projects. We factored in order wins of S$1.5bn for FY21F.
As of end-FY20, O&M had a negative equity of S$658m. Management expects to see cost savings of S$90m in FY21F from the O&M restructuring. We expect the division to turn into profits of ~S$39m.

Tracking its 3-year plan to unlock S$3bn-5bn of assets, Keppel Corp accelerated its divestment efforts since Oct, selling ~S$1.2bn of property projects, with an estimated gain of more than S$120m.
Recall that Keppel Corp has identified a group of assets worth S$17.5bn to monetise over time, specifically S$3bn-5bn within three years since Oct 20. 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 roll forward our SOP valuations to FY22F, largely based on previous segment’s disclosure for now, see details in PDF report below.
See Keppel Corp Share Price; Keppel Corp Target Price; Keppel Corp Analyst Reports; Keppel Corp Dividend History; Keppel Corp Announcements; Keppel Corp Latest News.
Near-term catalysts include successful sale or chartering of rigs or winning of renewable orders.
Downside risks: a prolonged O&M restructuring process.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-01-28

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