Keppel Corporation - Hitting the Fast-Forward Button on Clean Energy

Date: 23/04/2021

Source  :  DBS
Stock  :  Keppel Corp       Price Target  :  6.20      |      Price Call  :  BUY
        Last Price  :  6.75      |      Upside/Downside  :  -0.55 (8.15%)

  • Encouraging 1Q21 operating results of Keppel Corp affirms recovery across the board.
  • Huge S$3bn Brazil FPSO contract almost in the bag.
  • Accelerating its clean energy transition into renewables and EVs.
  • Upgrade Keppel Corp to BUY. Decent 3-4% yield on offer.

Keppel Corp's 1Q21 Results Saw Encouraging Improvement Across the Board

Commendable 1Q21 a much-awaited indicator for turnaround.

  • In its quarterly business update, Keppel Corporation (SGX:BN4) posted encouraging operational improvements across all segments. It is expected to post higher net profit as compared to S$160m a year ago, bucking the disappointing earnings trend in the past 3 quarters. This would form > 22% of our FY21F net profit estimate, which seems on track.
  • Revenue grew ~70% as home sales tripled y-o-y on the back of higher contribution from China and Vietnam property trading projects. Divestment gains totaled ~S$100m in 1Q21 based on our estimates, following the completion of three property disposals in China, Vietnam and UK. This points to an improving property market and sentiment.
  • Divestment of Keppel Bay Tower is expected to be completed in 2Q 2021, unlocking cash of ~S$600m and ~S$16m gains.
  • SSTEC sold a commercial and residential land plot in Tianjin Eco-City in Mar 2021, which will likely be completed in May-2021. We estimate this to yield ~S$30-35m in profit attributable to Keppel Corp.

Keppel O&M: Game-changing FPSO contract nearly in the bag.

  • Keppel Corp is in advanced talks with Brazil’s Petrobras to build a Korean yard is game-changing in our view, signaling the revolution of shipyards that once competed head-on for projects. Upon materialisation, the FPSO contract will double Keppel Corp’s orderbook to ~S$6bn.
  • As Keppel Corp continues to pursue M&A opportunities for Keppel O&M, a successful divestment to redeploy resources could be another re-rating catalyst.

First Solar Farm to come online in 2023.

  • At end-2020, Keppel Renewable Energy entered into an agreement to acquire a 45% sustainability goals, the solar farm investment will also provide a steady income stream going forward. We estimate that profit contribution could grow from S$5-10m pa to S$100m p.a. assuming its 7GW target is achieved.

Jumping onto the electric vehicles (EV) bandwagon.

  • On 21 Apr, Keppel Corp signed a MOU with one of the largest private EV charging operators in China - Wanbang Digital Energy Pte Ltd (StarCharge) - to explore developing, owning and operating Keppel Corp’s sustainability goals and supports Singapore government’s plans to more than double the targeted number of EV charging points in public carparks and private premises by 2030, from 28,000 to 60,000.

KrisEnergy – probably the last shoe to drop.

  • Keppel's share price has fallen by 3-4% following KrisEnergy's announcement, sparking ongoing concerns due to disappointing output from its crown jewel oilfield that played a critical role in cash flow generation under the restructuring plan. Keppel Corp is evaluating the potential financial impact relating to KrisEnergy (SGX:SK3) and will determine the best course of action.
  • Keppel Corp’s total exposure to KrisEnergy is around S$420m, of which S$170m is captured on Keppel Corp’s book (loan receivables, zero-coupon debt and contract assets) while S$250m of revolving credit facilities (RCF) is not on Keppel Corp’s book but it has provided a corporate guarantee.
  • The debts are backed by first right claim on KrisEnergy’s oil and gas assets. Hence, some significant portion of the amount should be recouped via asset sale in the worst-case scenario that KrisEnergy goes under. We should have more colour on this in the next few months.

Raising the Bar

  • In view of the improving business outlook of Keppel Corp, we remove the 10% discount to book value for Urban Development segment. Our target price for Keppel Corp is nudged up to S$6.20 (from S$5.85), which implies ~1x P/B, or 0.5 standard deviation below 5-year mean.

Source: DBS Research - 23 Apr 2021

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