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Keppel Corporation - Phillip Securities 2021-08-02: Firing On All Cylinders

KEPPEL CORPORATION LIMITED (SGX:BN4) | SGinvestors.io KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - Firing On All Cylinders

  • Keppel Corp (SGX:BN4)'s net profit of S$300mn in 1H21 ahead, at 70.8% of our FY21e earnings, boosted by recognition of S$269mn from its share of Floatel’s restructuring gains.
  • Keppel Offshore & Marine (O&M) turned EBITDA-positive in 1H21. Net orderbook grew over 70% y-o-y.
  • Vision 2030 asset monetisation program ahead of schedule. Updated guidance now at higher end of S$3 – 5bn guidance range by 2023.
  • We raise our Keppel Corp's FY21 earnings forecast by 46% for higher estimates for its O&M, Urban Development and Asset Management businesses on promising tailwinds.
  • Maintain BUY on Keppel Corp with higher SOTP-based target price of S$6.28 from S$6.20.



The Positives


Net profit ahead, boosted by S$269mn from Floatel’s restructuring gains.

  • Net profit was a significant improvement over the net loss of S$537mn for 1H20, which was hit by a S$930mn impairments of its O&M business. The improvement was led by better showings across the segments except asset management, further boosted by gains from a reclassification of Keppel Infra Trust (SGX:A7RU) and sale of Keppel DC REIT (SGX:AJBU) units.
  • Keppel Corp's 1H21 interim dividend of S$0.12, up four times from last year, reflects management’s confidence in the Group’s prospects.

Keppel O&M turned EBITDA-positive in 1H21; net orderbook grew over 70% y-o-y.

  • Keppel O&M generated a net profit of S$107mn in 1H21, from a loss of S$959mn a year ago. This year’s profit included the recognition of S$269mn from its share of Floatel’s restructuring gains. Despite increased manpower costs and COVID-19 manpower disruptions at its Singapore yards, Keppel O&M was EBITDA-positive.
  • In 1H21, Keppel O&M secured S$3.1bn of new orders, including a floating production, storage and offloading (FPSO) P-78 contract and an FPSO topside fabrication project more recently in July. Net orderbook grew over 70% to S$5.7bn as at end-June 2021, from S$3.3bn in the same period last year.

Vision 2030 asset monetisation program ahead of schedule; updated guidance now at higher end of S$3 – 5bn guidance by 2023.

  • Keppel Corp has announced the monetisation of over S$2.3bn in assets since the asset monetisation program was announced in September 2020. It now expects to surpass the S$3bn milestone well ahead of its original 3-year schedule. It aims to achieve the higher end of its S$3 – 5bn target by the end of 2023.
  • Through proactive asset monetisation, free cash flow and net gearing improved. Free cash inflow was S$499mn compared to an outflow of S$664mn last year. Keppel Corp's net gearing was lowered to 0.85x as at 30 June 2021, from 0.91x as at 31 December 2020.


Negatives


M1’s net profit 47.5% lower y-o-y from lower roaming and prepaid revenue.

  • M1’s net profit of S$21mn was lower than its S$40mn in 1H20. This was mitigated by a divestment gain from its interest in Keppel Logistics (Foshan), following an agreement reached with the local authorities on Lanshi’s port-closure compensation and lower net interest expense.


Outlook

  • Keppel O&M and Sembmarine (SMM SP, Non-rated) are in preliminary discussions on a potential combination. We expect some form of agreement in the fourth quarter of 2021. While nothing has been firmed up, we view the discussions positively as it provides better clarity on the fate of its O&M unit. With the overhang removed, along with the planned divestment of its logistics unit, we believe Keppel Corp will be re-rated.
  • The proposed transactions are expected to be earnings-accretive for Keppel Corp in the current financial year on a pro-forma basis, although there is no guarantee of completion by this year. Keppel Corp’s net debt should fall as a result of the deconsolidation of Keppel O&M and receipt of part of the consideration from the merged entity. Distribution in specie of the merged entity will, however, reduce Keppel Corp’s shareholders’ funds. Overall, net gearing is not expected to be much affected by the transactions.
  • We raise our Keppel Corp's earnings forecast for FY21e by 46% for higher estimates for its O&M, Urban Development and Asset Management businesses on promising tailwinds. We also account for its share of Floatel’s restructuring gains and faster monetisation of its North Island site in Tianjin Eco-City.

Maintain BUY on Keppel Corp with higher target price of S$6.28

  • We maintain our BUY recommendation on Keppel Corp and raise our target price to S$6.28 from S$6.20.
    • We ascribe a higher multiple to its O&M division on the back of an improving sector outlook. We now value O&M at 0.8x book vs 0.7x previously.
    • We continue to value its property segment at a 40% discount to RNAV and infrastructure division at 12x FY21e earnings, in line with peers.
    • We value M1 at 12x FY21e earnings, a slight discount to listed peers’ average of 13x.
    • Keppel Corp’s stake in Sino-Singapore Tianjin Eco-city is valued at 1.5x book value.
    • We also apply a 10% holding-company discount.
  • Our target price translate to about 1.0x FY21e book value, a slight discount to its 5-year average of 1.05x.
  • Catalysts expected from contract wins and a successful resolution to its O&M unit.
  • See
  • Risks to our view include
    1. a prolonged resolution for Keppel O&M,
    2. a weakening of oil prices and
    3. a worsening global economy.





Terence Chua Phillip Securities Research | https://www.stocksbnb.com/ 2021-08-02
SGX Stock Analyst Report BUY MAINTAIN BUY 6.28 UP 6.200



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