Highlights

Keppel Corporation - 2020 a New Dawn and a New Day

Date: 29/01/2021

Source  :  UOB KayHian
Stock  :  Keppel Corp       Price Target  :  6.10      |      Price Call  :  BUY
        Last Price  :  5.32      |      Upside/Downside  :  +0.78 (14.66%)
 


  • Keppel Corp reported a FY20 full-year loss of S$506m as it was impacted by large impairments that were made in 1H20. The company disclosed that it will be exiting the rig-building industry in a phased manner, which we view positively, and it has also put its logistics business up for sale as it remains sub-scale.
  • Keppel Corp remains inexpensive, trading at 1 standard deviation (SD) below its 5-year mean P/B of 1.0x. Maintain BUY. Target price: S$6.10.

Keppel Corp's FY20 Net Profit Hit by Impairments as Expected

  • Keppel Corp (SGX:BN4) reported a 13% y-o-y decline in 2020 revenue to S$6.6b which bettered our estimates. Due to S$952m in impairments for the year, of which S$930m was made in 1H20, Keppel Corp reported a net loss of S$506m vs a net profit of S$707m in 2019.

A Positive Move to Exit the Rig-building Industry

  • Post a lengthy strategic review, Keppel Corp disclosed that it plans to exit the rig-building industry by separating its Keppel Offshore & Marine (KOM) business into three companies :
    • Operating Co – An asset-and people-light company focused on design, engineering & procurement; fabrication to be subcontracted to third parties;
    • Rig Co – To charter/manage Keppel Corp’s rigs with the ultimate aim to sell all rigs; to be dissolved thereafter;
    • Development Co – To complete construction of Keppel Corp’s S$3.3b orderbook; to be dissolved thereafter.

In Our View, Exiting the Rig-building Business Is Positive

  • In our view, exiting the rig-building business is positive, given our bearish sector view for the next 12-18 months at the very least. Rig day rates and utilisation rates for all asset classes declined throughout 2020 despite starting the year with already poor numbers.
  • In our view, these figures are not expected to recover in the medium term. While Brent oil price has struggled back to the mid-US$50/bbl levels, the COVID-19 pandemic has delayed the oil industry restarting its capex spending. As a result, putting Keppel Corp’s S$2.9b worth of stranded rig assets into Rig Co – with the ultimate aim of selling them – and completing the current S$3.3b orderbook via Development Co will enable the company to ultimately leave the rig-building industry.
  • Importantly, Operating Co will focus on higher value-adding design, engineering and procurement work while fabrication will be outsourced to third parties. Management stated that new order flow in the rig industry has been exceedingly hard to come by, and that inorganic options have not been ruled out.

Logistics Business Also Up for Sale

  • Keppel Corp, via Keppel T&T, has also put up its Southeast Asia and Australia logistics business for sale (either full or partial). While this business has been a beneficiary of the COVID-19 pandemic and thus seen strong volume growth, Keppel Corp’s management believes that it will be able to grow faster if it were managed by a specialist logistics company.
  • In 2020, Keppel Logistics made a loss of S$22m vs a loss of S$26m in 2019. Management disclosed that there are a number of interested buyers and first bids are expected in Feb 21.

Property Still Leading the Way

  • The urban development segment, which remains the largest profit-generating business unit for Keppel Corp, saw its net profit decline 9% y-o-y due to slower property sales as well as the lack of a tax write-back in 2020.
  • While the connectivity segment was negatively affected by M1’s 11% y-o-y decline in net profit, the unit suffered more from the lack of divestment gain as well as an increase in amortisation of intangibles and financing costs.
  • The asset management arm saw a 31% y-o-y increase in net profit on the back of higher management fees and a reclassification of Keppel Infra Trust (SGX:A7RU) from an associate to an investment.

Other Key Takeaways From the Result

  • Other key takeaways from Keppel Corp's FY20 result include a final dividend of S$0.07/share, which brings full-year dividends to S$0.10/share.
  • In addition, Keppel Corp has been gradually reducing its gearing. As at end-1H20, its gearing was around 1x; however, as at end-20, this had declined to 0.81x if we include the company’s asset sales last year from its 100-day plan which totalled over S$1.2b.

Positive Surprise With Keppel REIT’s Results

  • Positive surprise with Keppel REIT (SGX:K71U)’s results, which reported 2H20 DPU of S$0.0293 (+4.6% y-o-y) and 5% above our forecast. The achievement was all the more remarkable due to the higher base in 2H19 caused by capital gain distribution of S$6m.
  • Notably, the Singapore office portfolio saw positive rental reversion of 12.7% y-o-y in 4Q20 (2020: 14.8% y-o-y), portfolio weighted average lease to expiry (WALE) was a healthy 6.7 years (top 10 tenants was 11.8 years), portfolio occupancy still high at 97.9%, and rental collection was a healthy 98% in 4Q20.

Maintain BUY on Keppel Corp

  • We retain our BUY rating on Keppel Corp with a SOTP-based target price of S$6.10 (previously S$6.30). While Keppel Corp’s latest accounts show negative equity for the KOM business unit, we believe that there is still value in the business given its rigs on hand as well as its orderbook. Thus, we have valued it at a notional S$100m or S$0.05/share.
  • Keppel Corp's share price has recovered to trade at -1 standard deviation (SD) 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.
  • Share price catalysts include earnings-accretive acquisitions in the property space in China and Vietnam.

Source: UOB Kay Hian Research - 29 Jan 2021

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