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Keppel Corporation - Phillip Securities 2022-07-31: Tranforming Into Asset Light Recurring Income Business Model

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

Keppel Corporation - Tranforming Into Asset Light Recurring Income Business Model

  • Keppel Corp (SGX:BN4)'s 1H22 net profit below expectations, at 43% of FY22e profit but interim dividend of 15 cents exceeds expectations. Net profit of $498mil (+66% y-o-y) was slightly under our expectations as Urban Development dragged due to headwinds from China’s property market.
  • $710mil of assets monetised year-to-date, on-track to hit $5bn target by end-2023. However, we expect that Keppel Corp will cross the $5bn mark by 1Q23 should the proposed O&M transactions be completed on schedule in 4Q22.
  • We welcome the bolder statements made on Keppel Land’s transformation to be asset-light. We believe this will not only crystalise the value of its landbank, but it will also allow Keppel Corp to re-invest the proceeds into new growth areas and share some of the gains with shareholders through dividends.
  • Maintain BUY call on Keppel Corp with higher SOTP-based target price of $8.95 (previously.$7.07). We revised our valuation on Keppel O&M (KOM) and Keppel Land after greater clarity on its monetisation path. We valued Keppel Corp based on the four new segments unveiled during Vision 2030 to better reflect the Group’s reporting segments going forward. Our target price for Keppel Corp translates to about 1.2x FY22e book value, a slight premium to its historical average as the Group’s transformation plans gain traction and ROE expands to 8.8%.



Positives


1H22 net profit below expectations, at 43% of FY22e profit but interim dividend exceedsexpectations.

  • Net profit of $498mil (+66% y-o-y) was slightly under our expectations as Urban Development dragged due to headwinds from China’s property market.
  • Interim dividend of $0.15, came ahead of our expectations of $0.12, which we believe reflects management’s confidence in FY22’s outlook. We revise FY22e dividend to $0.33 from $0.29 with the payout ratio at 55% of earnings unchanged.

$710mil of assets monetised year-to-date, ontrack to hit $5bn target.

  • The $710mil of assets monetised year-to-date brings the cumulative amount announced to $3.6bn since October 2020. Management remains confident of exceeding its $5bn target by end-2023. We expect the conclusion of the proposed O&M transactions, still on track for completion by end-2022, to move the Group past its $5bn target.

Bolder statement on transformation of Keppel Land.

  • We welcome the management’s bolder statements on its plan forward for its Urban Development business. As part of its asset-light strategy, Keppel Corp has set out its plan to accelerate landbank monetisation in China and Vietnam in the next 1-2 years. We believe this can also be done through injections into Keppel-managed funds.
  • Transformation of Keppel Land into an asset-light urban space solutions provider will accelerate the growth of Keppel Corp’s recurring income (40.6% of 1H22 net profit vs 35% FY19). The move is in line with its asset-light strategy established in Vision 2030. It will also accelerate the growth of Keppel Corp’s recurring income closer to our longer-term target of 60% which we have modelled.


Negatives


Headwindsin China property market weigh on Keppel Land’s China property sales.

  • Keppel Land’s 1H22 China sales fell by ~69%, which is a steeper drop than most of the largest developers in the market, who have seen an average 50% drop. For FY22e, we do not expect any impairments for its China property business as ASPs have remained stable and the cost of its landbanks are also cheap. ASPs have largely held up as most of its projects are located in key cities across China. Its landbank, which have an average age of seven years, is also at a much lower price than the market value today.


Keppel's 1H22 segment developments


Outlook for O&M positive with potential for S$8bn contracts for Petrobras’s P-80 FPSO project.

  • In the latest Petrobras tender, Keppel O&M was selected as the only qualified bidder for the P-80 FPSO project. It is currently in advanced discussions for the P-80 contract as well as an option for a second FPSO. The two FPSO contracts, if awarded, would add over $8bn to its O&M orderbook. We believe this is testament to KOM’s competency over it’s peers, like Sembcorp Marine (SGX:S51), which was also vying for the same contract.
  • KOM secured $255mil of orders in 1H22 bringing its orderbook to $4.4bn in 1H22, down slightly from the $5.1bn in end-2021.

Infrastructure’s renewables portfolio expand to 1.8GW, still on track for 7GW by 2030.

  • Higher power prices and spark spreads in 1H22 lifted profits 77% y-o-y for 1H22. Keppel Infrastructure’s renewables portfolio co-investment of a European onshore wind energy asset will add 258MW to its renewable energy portfolio.

Advancing the transformation of Keppel Land into an asset-light business model to crystalise gains which can be shared with shareholders.

  • The management has laid out more substantive plans to significantly monetise Keppel Land’s landbank in China and Vietnam over the next one to two years. This includes the possibility of injecting its landbank into funds managed by Keppel Corp.
  • We believe this will not only crystalise the value of its landbank, but it will also allow the Group to re-invest the proceeds into new growth areas and share some of the gains with shareholders through dividend distribution.

Growing connectivity solutions.

  • Connectivity’s net profit was in-line with our forecasts, down 65% y-o-y from the absence of gain from the disposal of Keppel Logistics (Foshan). This was offset by M1’s net profit, which grew 62% y-o-y to $34mil, from the monetisation of its network assets in 1H22. In the 2Q22, M1’s revenue rose in tandem with borders re-opening, and is roughly half of pre-COVID levels.

Asset management continue to grow from strength to strength, with $200bn target.

  • 1H22 profit was up 32.5% y-o-y, in-line with our estimates. Along with the transformation of Keppel Land into an asset-light business model, its asset management division is expected to grow from the injection of assets into its funds. Current AUM is at $42bn with a target to grow this to $200bn.


Keppel's Outlook

  • Preparations to complete the proposed O&M transactions are progressing well. Management is hopeful on meeting the time line for completion. KOM is making encouraging progress with its legacy rigs, and is confident these rigs can be substantially monetised over the next three to five years.
  • We lower our revenue and earnings estimates for Keppel Land by 3% and 7% respectively on the worsening outlook in China’s property market. Keppel Land will launch 895 units in 2H22 and 2,664 units in China in FY23e, and we expect the response to be slightly muted with the current macro backdrop.
  • We continue to monitor the approval of the combined entity, and outcome of the remaining 10% of the combined entity shares which will be deposited into a segregated account for certain identified contingent liabilities and its plans for the $500mil cash.
  • We will provide updates of these developments as they come along.


ESG

  • Keppel Corp has the highest triple-A rating MSCI ESG ratings. It has held the triple-A rating since February 2020. Keppel is ranked among the top 8% of global industrial conglomerates, based on ESG criteria, in the MSCI All Country World Index.
  • Keppel Corp has been recognised by Corporate Knight’s Clean 200, as one of the companies leading the way in the transition to a cleaner energy future. We view its Vision 2030 plan to reach 7GW of renewable energy positively as it should lead to better profitability over time.

Maintain BUY with higher SOTP-based target price of $8.95 (previously $7.07)

  • We maintain our BUY recommendation on Keppel Corp with a higher SOTP-based target price of $8.95.
    • We revised our valuation on KOM and Keppel Land with greater clarity on its monetisation plan.
    • For its Energy & Environment business, we valued its O&M division at 0.8x book value but crank up the realisable value of its rigs.
    • Keppel Infrastructure Holdings is valued at 10x FY22e earnings.
    • For its Urban Development segment, we lowered the discount on Keppel Land’s RNAV to 35% (prev.40%) on better clarity on the monetisation plans for its Urban Development portfolio 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 1.2x FY22e book value, a slight premium to its historical average as the Group’s transformation plans gain traction.
  • As Keppel Corp accelerates its transformation into an integrated asset-light business, we believe there is room for a further reduction in the Holdco discount we apply to the Group over time. We will review the discount we apply to the Group as the Group continues its transformation.
  • See
  • Risks to our view include:
    • a delay in the approvals required for the Keppel-Sembmarine transaction; and
    • a worsening global economy.





Terence Chua Phillip Securities Research | https://www.stocksbnb.com/ 2022-07-31
SGX Stock Analyst Report BUY MAINTAIN BUY 9.95 UP 7.070



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