Keppel Corporation - CGS-CIMB Research 2021-04-23: Good Blend Of Old & New Economy

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - Good Blend Of Old & New Economy

Keppel Corporation updated that 1Q21 revenue was S$1.889bn (c.28% of our FY21F) and net profit was slightly higher y-o-y (1Q20: S$160m); we deem them in line.
Positives: Keppel O&M order book could double to S$6bn if P-78 contract is in, Bifrost secured maiden customer, strong home sale in China.
Negatives: Kris Energy impact still uncertain with total exposure of S$423m although mainly secured. Keppel O&M still loss-making.
Reiterate ADD on Keppel Corp with SOP-based target price of S$6.40. Announcement of new growth initiatives (e.g. renewables, electric vehicles) and divestments are key catalysts.

Keppel Corporation (SGX:BN4) in its 1Q21 business update reported stable y-o-y revenue of S$1.889bn, with higher contributions from
1. urban development (driven by +4% q-o-q home and land sales in Sino-Singapore Tianjin Eco-city (SSTEC)), and
2. asset management (MTM gains as well as stronger fee income).
See Keppel Corp's announcements.
Keppel O&M’s EBITDA turned positive q-o-q with narrower losses q-o-q. Cost reduction efforts continued with ~S$20m saved at Keppel O&M in 1Q21. Inorganic option (M&A) of Keppel O&M as well as chartering/selling of stranded assets are still in the pipeline.
M1’s 1Q21 EBITDA declined 25% y-o-y to S$55m on lower roaming and prepaid revenues.

We believe Keppel Corp could achieve ~S$3bn of new orders in FY21F (YTD: S$66m) with its order book expanding from S$3bn currently to S$6bn if it clinches the Petrobras P-78 Floating Production Storage Offloading (FPSO) contract. Management sounded hopeful in the conference call. If awarded the job, Keppel Corp will adopt an asset-light strategy and subcontract the hull out portion while focusing on the value-add integration.
Upstream reported that Keppel Corp’s Brazilian yard bid US$2.28bn for the project, working with Hyundai Heavy Industries. We estimate the hull production could be ~30% of total contract.

Management is still assessing the final impact from the troubled with DBS (SGX:D05), contract asset (S$29m), and zero-coupon notes (S$35m). The loan receivable (ranked more senior) and RCF are secured over KrisEnergy’s assets which include Cambodian oil concession Block A.

We are encouraged that Keppel Corp has secured its first customer, Philippine broadband provider Converge Information & Communications Technology, for its subsea fibre arm Bifrost Cable Systems (see report: Keppel Corporation - CGS-CIMB Research 2021-03-29: Connecting The Dots ~ World’s First Subsea Fibre Connecting Singapore To The US).
Converge will be granted an Indefeasible Right of Use (IRU) for one fibre pair on the main trunk of Bifrost Cable System which directly connects Singapore to the west coast of North America. In addition, Keppel Corp and Converge will jointly develop a branch on the Bifrost Cable System that will land in Davao, the Philippines, with Converge also being granted an IRU on the entire Davao branch. The additional branch will significantly increase internet speeds and network diversity for businesses and consumers in the Philippines.
Converge will invest over US$100m on the project, lightening Keppel Corp’s intended capex plan of US$350m.

Keppel Capital’s asset management fee income grew to S$42m in 1Q21 vs S$35m in 1Q20, mainly from infrastructure fund expansion as well as MTM gains.
During the quarter, Keppel Capital launched a China logistics property fund with a global institutional investor, achieving initial equity commitment of about RMB1.4bn, and secured a S$360m separate account mandate from Dutch pension fund manager PGGM to tap commercial real estate opportunities in Japan, China and Singapore.

Keppel Land’s home sales grew 4% q-o-q in 1Q21 to 1,360 units, mainly in China (+32% q-o-q) and Singapore (+200% q-o-q). Notably, 80% of the 429 units at The Reef at King’s Dock have been sold as at end-Mar 2021. It made no new sale during the quarter for 19 Nassim luxury project (due to the project’s location and by-invitation-only viewing).
SSTEC (Sino-Singapore Tianjin Eco-City) sold a commercial and residential land plot in Eco-City in Mar 2021 for ~Rmb1.5bn. The transaction is still not completed but we believe the gain from the sale may not be material.

In 1Q21, Keppel Corp completed previously announced divestments (Chengdu Hilltop Development, Dongnai Waterfront City and First King Properties) realising total gain of ~S$108m. Keppel Corp's net gearing improved to 0.88x at end-Mar vs 0.91x at end-FY21.
We estimate Keppel Corp will recognise at least ~S$160m cumulative gain by 1H21F.
See
Key risk to our ADD call: unsuccessful sale/charter of stranded rigs.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-04-23

SGX Stock Analyst Report ADD MAINTAIN ADD 6.400 SAME 6.400