Keppel Corporation - Good Blend of Old & New Economy

Date: 23/04/2021

Source  :  CIMB
Stock  :  Keppel Corp       Price Target  :  6.40      |      Price Call  :  BUY
        Last Price  :  6.73      |      Upside/Downside  :  -0.33 (4.90%)

  • Keppel Corporation updated that 1Q21 revenue was S$1.889bn (c.28% of our FY21F) and net profit was slightly higher y-o-y (1Q20: S$160m); we deem them in line.
  • Positives: Keppel O&M order book could double to S$6bn if P-78 contract is in, Bifrost secured maiden customer, strong home sale in China.
  • Negatives: Kris Energy impact still uncertain with total exposure of S$423m although mainly secured. Keppel O&M still loss-making.
  • Reiterate ADD on Keppel Corp with SOP-based target price of S$6.40. Announcement of new growth initiatives (e.g. renewables, electric vehicles) and divestments are key catalysts.

Urban Development and Asset Management Led Growth

  • Keppel Corporation (SGX:BN4) in its 1Q21 business update reported stable y-o-y revenue of S$1.889bn, with higher contributions from
    1. urban development (driven by +4% q-o-q home and land sales in Sino-Singapore Tianjin Eco-city (SSTEC)), and
    2. asset management (MTM gains as well as stronger fee income).
  • Keppel O&M’s EBITDA turned positive q-o-q with narrower losses q-o-q. Cost reduction efforts continued with ~S$20m saved at Keppel O&M in 1Q21. Inorganic option (M&A) of Keppel O&M as well as chartering/selling of stranded assets are still in the pipeline.
  • M1’s 1Q21 EBITDA declined 25% y-o-y to S$55m on lower roaming and prepaid revenues.

Order Book Could Double With P-78 by 1H21F, Asset Light Strategy

  • We believe Keppel Corp could achieve ~S$3bn of new orders in FY21F (YTD: S$66m) with its order book expanding from S$3bn currently to S$6bn if it clinches the Petrobras P-78 Floating Production Storage Offloading (FPSO) contract. Management sounded hopeful in the conference call. If awarded the job, Keppel Corp will adopt an asset-light strategy and subcontract the hull out portion while focusing on the value-add integration.
  • Upstream reported that Keppel Corp’s Brazilian yard bid US$2.28bn for the project, working with Hyundai Heavy Industries. We estimate the hull production could be ~30% of total contract.

Chapter Closing Soon for KrisEnergy?

  • Management is still assessing the final impact from the troubled with DBS (SGX:D05), contract asset (S$29m), and zero-coupon notes (S$35m). The loan receivable (ranked more senior) and RCF are secured over KrisEnergy’s assets which include Cambodian oil concession Block A.

Bifrost Cable Secured 1st Customer, Monetising Capex in Advance

  • We are encouraged that Keppel Corp has secured its first customer, Philippine broadband provider Converge Information & Communications Technology, for its subsea fibre arm Bifrost Cable Systems (see report: Keppel Corporation - CGS-CIMB Research 2021-03-29: Connecting The Dots ~ World’s First Subsea Fibre Connecting Singapore To The US).
  • Converge will be granted an Indefeasible Right of Use (IRU) for one fibre pair on the consumers in the Philippines.
  • Converge will invest over US$100m on the project, lightening Keppel Corp’s intended capex plan of US$350m.

Keppel Capital Fee Income Expanded

  • Keppel Capital’s asset management fee income grew to S$42m in 1Q21 vs S$35m in about RMB1.4bn, and secured a S$360m separate account mandate from Dutch pension fund manager PGGM to tap commercial real estate opportunities in Japan, China and Singapore.

Strong Pick-up in Home Sales in China and Singapore

  • Keppel Land’s home sales grew 4% q-o-q in 1Q21 to 1,360 units, mainly in China (+32% q-o-q) and Singapore (+200% q-o-q). Notably, 80% of the transaction is still not completed but we believe the gain from the sale may not be material.

Divestment Gain of S$108m in the Bag; 1H21F: at Least S$160m

  • In 1Q21, Keppel Corp completed previously announced divestments (Chengdu Hilltop Development, Dongnai Waterfront City and First King Properties) realising total gain of ~S$108m. Keppel Corp's net gearing improved to 0.88x at end-Mar vs 0.91x at end-FY21.
  • We estimate Keppel Corp will recognise at least ~S$160m cumulative gain by 1H21F.
  • Key risk to our ADD call: unsuccessful sale/charter of stranded rigs.

Source: CGS-CIMB Research - 23 Apr 2021

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