Keppel Corporation - Going Light; Restructuring O&M

Date: 28/01/2021

Source  :  CIMB
Stock  :  Keppel Corp       Price Target  :  6.40      |      Price Call  :  BUY
        Last Price  :  5.30      |      Upside/Downside  :  +1.10 (20.75%)

  • Market could be neutral over Keppel Corp’s strategy of moving into an asset-light operating company (Op Co) over time, while trying to offload stranded rigs.
  • Keppel Corp's FY20 net loss of S$506m was wider than our S$237m forecast due to weaker-than expected O&M in 2H20 and some impairment expenses.
  • Reiterate ADD, with an SOP-based target price of S$6.40.
  • Keppel Corp's O&M restructuring efforts to take time to bear fruit. Medium-term catalyst: full exit from rig business.

Outcome of Keppel's Strategic Review of O&M and Logistics

  • We think that the market had hoped for Keppel Corporation (SGX:BN4) to fully divest its O&M, while retaining its renewable energy division from its strategic review exercise. However we note that the environment is challenging and an immediate exit may not be feasible.
  • We take comfort that Keppel Corp will exit offshore rig building, after completing the existing rigs, and progressively exit low value-add repairs.
  • Keppel Corp reiterated that an inorganic option is still on the table (i.e. merger/full divestment). Keppel T&T’s logistic is likely to remain in albeit at a reduced stake, to ride on the e-commerce demand.

Asset-light O&M Op Co Over Time; 15% ROE Target Remains

  • Keppel’s O&M will be restructured into three parts, and transient entities will be created to hold legacy completed and uncompleted rigs worth S$2.9bn.
    • Rig Co comprises completed rigs, which will be chartered out or sold. The near-term outlook for rig chartering/ sale is still tough, and it could take a year or so to see meaningful recovery, depending on the oil price trend.
    • Development Co will focus on completing the uncompleted rigs — mainly three semi-subs for Awilco and Sete Brasil and five jack-ups for Borr Drilling. The Development Co will be wound up eventually.
    • Operating Co is the future of KEP O&M, focusing on floating infrastructure and infrastructure-like projects that can deliver predictable streams of cashflow, including renewables projects.
  • With S$1bn of order wins in 2020, Keppel's O&M orderbook stood at S$3.3b as at end-2020, with ~80% in gas solutions and renewables projects. We factored in order wins of S$1.5bn for FY21F.
  • As of end-FY20, O&M had a negative equity of S$658m. Management expects to see cost savings of S$90m in FY21F from the O&M restructuring. We expect the division to turn into profits of ~S$39m.

Successfully Divested S$1.2bn of Assets Since Oct 20

  • Tracking its 3-year plan to unlock S$3bn-5bn of assets, Keppel Corp accelerated its divestment efforts since Oct, selling ~S$1.2bn of property projects, with an estimated gain of more than S$120m.
  • Recall that Keppel Corp has identified a group of assets worth S$17.5bn to monetise over time, specifically S$3bn-5bn within three years since Oct 20. Among the assets under review, S$7bn will be from land bank and some projects under development carried at cost; S$4.8bn through REITs; S$3.9bn of non-core assets (including Keppel O&M’s rigs) and S$1.8bn funds/ investments.

Reiterate ADD on Keppel Corp, Target Price at S$6.40 on SOP Valuations

  • We roll forward our SOP valuations to FY22F, largely based on previous segment’s disclosure for now, see details in PDF report below.
  • Near-term catalysts include successful sale or chartering of rigs or winning of renewable orders.
  • Downside risks: a prolonged O&M restructuring process.

Source: CGS-CIMB Research - 28 Jan 2021

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