Keppel Corporation 1Q21 Business Update - UOB Kay Hian 2021-04-23: Some Hits, Some Misses

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation 1Q21 Business Update - Some Hits, Some Misses

Keppel Corp reported stronger-than-expected revenue for 1Q21 with profit seen in all key business units, with the exception of the O&M segment. The key positive newsflow in the near term is the potential P-78 FPSO contract win in Brazil that could conceivably double Keppel Corp’s current S$3b orderbook, although continued travails at KrisEnergy will need to be closely monitored.
Maintain BUY. Target price: S$6.37.

Keppel Corp (SGX:BN4) also disclosed that all key business units apart from its offshore marine (O&M) segment were profitable, and that its net gearing had declined to 0.88x as at end-1Q21 vs 0.91x as at end-20.

The key positive news for the O&M segment was the potential contract for the P-78 Petrobras FPSO which, if won, could see a near doubling of Keppel Corp’s current S$3b net orderbook. In our view, this deviates from the company’s stated asset-light/people-light strategy for the O&M business. However, we cannot fault the company from taking an opportunistic view towards this sizeable contract that has an attractive milestone-payment structure.
In 1Q21, Keppel Corp secured S$66m in upgrading and repair contracts and said that it is seeing increased demand for newbuild cable-lay ships.

KrisEnergy (SGX:SK3) announced on 20 Apr 21 that its Apsara project offshore Cambodia has had disappointing production results and thus could affect the company as a going concern. The reserves auditors, Netherland Sewell & Associates Inc. (NSAI), have been engaged to independently review whether Apsara is commercial enough to warrant KrisEnergy’s continued restructuring, or for the company to be liquidated.
Keppel Corp holds some of KrisEnergy’s oil and gas assets as collateral against the loans outlined below, but their current value has not been disclosed.

The urban development segment saw a major rebound with a 2.5x y-o-y increase in home sales value to S$1.55b, underpinned by a tripling of home sales in China, Singapore and Vietnam, as well as divestment gains due to the sale of three projects in China, Vietnam and UK. This segment will continue to report strong numbers in 2Q21 given that the divestment of Keppel Bay Tower and the sale of a commercial and residential plot at Tianjin Eco-City will be completed only in the current quarter.
In terms of its landbank, Keppel Corp has 8,740 overseas units worth S$4.7b that will be recognised over 2Q21 to end-25, and about.46,000 units in total (see chart at RHS).

While the financial performance for the infrastructure segment was uninspiring with revenue and EBITDA declining 2% and 28% y-o-y respectively, the outlook appears interesting given that Keppel Corp will be rolling out electric vehicle (EV) charging infrastructure in Singapore and pursue EV-related opportunities domestically and overseas.
Longer term, Keppel Corp highlighted its 7GW target for green energy ownership with the short-to medium-term expansion focus being Australia.

In the connectivity segment, M1 saw a 25% y-o-y decline in EBITDA to S$55m due to lower roaming and prepaid revenues. The highlight was Keppel Corp’s S$467m subsea fibre cable initiative (in partnership with Facebook and Telkom Indonesia) that was announced during the quarter called Bifrost.
During the analyst call, Keppel Corp’s management stated that the project’s IRR will be “attractive” and that it will look to de-risk the project by selling capacity to customers prior to the cable coming on-line in 2024.

Keppel REIT (SGX:K71U) reported a 22% y-o-y increase in 1Q21 distributable income to S$51.6m (equivalent to DPU of 1.47 cents), and in line with our expectations. NPI attributable to unitholders increased 41% y-o-y in 1Q21 due to contributions from assets in Melbourne and Sydney as well as associates and JVs due to lower cost of borrowings, appreciation of the A$ and one-off income. Besides, its Singapore assets saw stable occupancy and positive rental reversions.
Keppel REIT’s weighted average lease expiry remains long at 6.7 years (top 10 tenants: 11.8 years). We expect Keppel REIT to maintain positive rental reversion as average expiring rents are low at S$9.98psf in 2021 and S$10.27psf in 2022. We have a BUY rating on Keppel REIT with a target price of S$1.49 implying a 23% upside. See Keppel REIT - UOB Kay Hian 2021-04-22: 1Q21 Resurgence Of Growth.

We have upgraded Keppel Corp's earnings forecast for 2021-23 by 9-16% on the back of stronger-than-expected recovery in the urban development segment as well as higher asset management fees.
Risks to Keppel Corp's share price in the near to medium term include:
1. wider outbreak of COVID-19 infections at foreign workers’ dormitories, and
2. liquidation of KrisEnergy should the NSAI report find that the Apsara field is uneconomical.

We retain our BUY rating on Keppel Corp with a SOTP-based target price of S$6.37 (previously S$6.10). Our valuation incorporates a higher target price for Keppel REIT of S$1.49 (S$1.20 previously) as well as a potential S$0.23 loss should the liquidation of KrisEnergy proceed.
Keppel Corp's share price has recovered to trade at -1SD below its 5-year average P/B of 1.0x. Should regional economies continue to recover well from the COVID-19 pandemic in 2021, we believe that this gap can further close in the coming quarters.
See

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-04-23

SGX Stock Analyst Report BUY MAINTAIN BUY 6.37 UP 6.100