Keppel Corporation 2H21 Results - Phillip Securities 2022-01-31: Blow Past Expectations

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation 2H21 Results - Blow Past Expectations

Keppel Corp (SGX:BN4)'s FY21 net profit of S$1.01bn is ahead of our forecasts, 63.7% above our FY21e earnings. The surprise came from fair value gains from its investments in new technology and startups.
Keppel Corp announced $500mil share buyback program and S$0.21 final dividend to reward shareholders.

Planned business transformation of Keppel Corp on track. Keppel Offshore & Marine (KOM) - Sembcorp Marine (SGX:S51) and logistics divestment definitive agreement expected by end-1Q22.

Keppel Corp's 2H21 net profit was a significant improvement over the previous period as all its business units saw growth accelerate.
Business segments:
- Energy & Environment: Keppel Corp's Offshore & Marine division achieved better results driven by better cost management and a lower share of losses from associated companies.
- Urban development: Despite the more cautious environment in China, sales still increased 32% y-o-y.
- Connectivity segment: Logistics turned around from the loss last year from the disposal of its interest in Keppel Logistics (Foshan) and Wuhu Sanshan Port.
- Asset Management: Higher contribution from acquisitions and divestments by the REITs & Trust as well as fair value gains of its investment properties and data centres. Corporate & Others surprised with FY21 net profit of $309mil driven by fair value gains from its investments in new technology & startups.
Overall, FY21 profit of $1.01bn is a reversal of the $508mil loss last year.

Keppel Corp has announced a $500mil share buyback program which will be held as treasury shares to be used in part for the annual vesting of employee share plans, and also as possible currency for future M&A activities. We view the share buyback program positively as current Keppel Corp share price is below its net asset value of $6.41.
Keppel Corp has also proposed a final dividend of S$0.21, bringing full year dividend to S$0.33. FY21 dividends represent a 45% payout ratio, in-line with previous years, after ring-fencing KrisEnergy (SGX:SK3) impairment.

Keppel Corp has announced $2.9bn of monetisation since the asset monetisation program was announced in September 2020. It now expects to surpass the $5bn milestone well ahead of schedule. The planned divestment of its Offshore & Marine unit and its logistics business is also progressing steadily.
Keppel Corp expects to reach a definitive agreement with Sembcorp Marine by end-1Q22. It has also received bids for its logistics business and is working on definitive agreements by end-1Q22 for divestment of its Southeast Asia/Australia logistics business.

We were a little disappointed on the lack of clarity on the time-line for its acquisition of SPH (SGX:T39). The absence of a clear time-line in our view is an overhang on the stock.

The next catalyst investors should look out for is the proposed merger of KOM and Sembcorp Marine. The management is working towards signing definitive agreements by end-1Q22. The outlook of the industry is also improving, underpinned by firmer oil prices. Modern jackup rig utilisation and day rates are expected to improve as oil prices continue to rise. We expect KOM’s legacy rigs to be substantially monetised in the next three to five years on the back of the improving industry outlook.
While nothing has been firmed up, we view the developments 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.

We maintain our BUY recommendation on Keppel Corp with an unchanged SOTP-based target price of $7.07.
We valued Keppel Corp based on the four new segments unveiled during Vision 2030 to better reflect the Group’s reporting segments going forward.
- For its Energy & Environment business, we valued its O&M division at 0.8x book value. Keppel Infrastructure Holdings is valued at 10x FY22e earnings.
- For its Urban Development segment, we applied a 40% discount on Keppel Land’s RNAV and 1.5x price to book value of the Sino-Singapore Tianjin Eco-City.
- In the Connectivity segment, we valued M1 at 9x FY22e earnings.
- For the Asset Management division, we valued Keppel Capital at 10x FY22e earnings, a slight discount to its peers.
We also applied a holding-company discount of 20% to the Group. Our target price for Keppel Corp translates to about 1.0x FY22e book value, in-line with its 5-year average.
See
Risks to our view include
- a prolonged resolution for Keppel O&M,
- lack of developments on the SPH resolution and
- a worsening global economy.

Terence Chua Phillip Securities Research | https://www.stocksbnb.com/ 2022-01-31

SGX Stock Analyst Report BUY MAINTAIN BUY 7.070 SAME 7.070