Keppel Corporation - (Downgrade To) HOLD for More Clarity on Restructuring

Date: 29/01/2021

Source  :  DBS
Stock  :  Keppel Corp       Price Target  :  5.85      |      Price Call  :  HOLD
        Last Price  :  6.75      |      Upside/Downside  :  -0.90 (13.33%)

  • Keppel Corp reported higher than expected losses of S$506m in FY20; declared 7 cents final dividend.
  • Transforming Keppel Offshore & Marine (KOM) into an asset light company; pursuing inorganic options.
  • Full or partial divestment of Keppel Logistics on the cards.

Keppel Corp's First Full Year Loss Since Asian Financial Crisis (AFC)

  • Keppel Corporation (SGX:BN4) reported S$506m net loss for FY20 (vs net profit of S$707m in FY19) dragged by ~S$1bn impairment at Keppel O&M (KOM).
  • This is Keppel Corp’s first ever full year loss since Asian Financial Crisis (AFC) in 1998. Urban Development and Asset Management were the main earnings contributors, at S$438m and S$280m respectively.

Businesses have been re-segmentised.

  • As shared during the V2030 press release in May-2020, starting from FY20, Keppel Corp's segmental breakdown has been reclassified as follows:
    • Energy & Environment
      • Keppel O&M
      • Keppel Infrastructure
      • Keppel Renewable Energy
      • KrisEnergy (SGX:SK3)
    • Urban Development
      • Keppel Land
      • Keppel Urban Solutions
      • Tianjin Eco -City
    • Connectivity
      • M1
      • Keppel Data Centres
      • Keppel Logistics
    • Asset Management
      • Keppel Capital
      • Eco-system of private funds and listed REITs & Trust.

Declared 7 cents final dividend.

  • Together with 3 cents interim dividend, Keppel Corp's FY20 full year dividend totaled 10 cents, a tad lower than our expectation of 11 cents. This implies ~2% dividend yield.

Net gearing lower 0.91x as of end 2020, vs 0.96x in 3Q20.

Executing Vision 2030; First Wave - 100 Day Plan Completed; More Waves Ahead

  • Keppel Corp has announced > S$1.2bn of divestments since Oct-2020, in line with its 3-year target of S$3-5bn. It has pursued new growth opportunities, including renewable projects and launching new funds. It is now embarking on the second wave of initiatives.

Strategic Review of O&M – Organic Transformation Including Exit of Rigbuilding Business; Continues to Explore Inorganic Options

  • KOM will be transformed into a nimble, asset-light and people-light Operating Company (Op Co). Op Co will focus on seizing opportunities in the energy transition, such as floating infrastructure and infrastructure-like projects including renewables, gas solutions, new energy solutions and production assets. It will also collaborate with other Keppel Corp's business units to provide other urbanisation solutions such as offshore and nearshore infrastructure, and floating data centre parks.
  • The streamlined KOM operations could save ~S$90m operating cost per annum. Though we are wary of potential restructuring expenses and / or risk of fixed asset write downs.

Exit rigbuilding business.

  • KOM will exit the offshore rigbuilding business, and progressively the low value-added repairs and other activities. It plans to move up the value chain by focusing on design, engineering and procurement with fabrication work subcontracted to third parties.
    • Rig Co and Development Co. Addressing the S$2.9bn of legacy completed and uncompleted rigs on its balance sheet by ring-fencing and putting them under Rig Co and Development Co (Dev Co) respectively.
    • Completed rigs in the Rig Co will be chartered out or sold depending on opportunities available. Rig Co can also be monetised or spun off when it is cash flow generating.
    • The Dev Co will focus on completing the uncompleted rigs, focusing on rigs that have firm contracts with customers. Completed rigs will either be delivered to customers or transferred to the Rig Co and put to work or sold.
    • Both the Rig Co and Dev Co are transient structures. They are projected to require net funding of about S$500m from the Group, mainly to complete the rigs.
  • Keppel Corp will continue to actively pursue inorganic options for KOM.

Strategic Review of Logistic Business

  • Keppel Corp plans to divest, fully or partially, of Keppel Logistics in view of the low scalability under Keppel. It has received good interest from the market and first bids are expected in Feb-2021.

Earnings Revisions

  • We have lowered our Keppel Corp's FY21F earnings forecast by 14% to S$716m, factoring losses for KOM.
  • Keppel Corp's share price has risen ~30% since our upgrade at end Sept.

Source: DBS Research - 29 Jan 2021

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