Keppel Corporation Ltd – Asset monetisation drives its valuation April 24, 2023 435

PSR Recommendation: ACCUMULATE Status: Downgraded
Last Close Price: 6.81 Target Price: 7.01
  • 1Q23 revenue only rose marginally by 3% YoY, excluding the divested offshore and marine division. Urban development led the growth, driven by higher home sales in China and India. Net profit was only slightly higher.
  • Disposal of Keppel Offshore & Marine resulted in a gain of S$3,300mn, but equity is reduced by S$3,845mn with the distribution-in-specie of SembCorp Marine (SMM) shares. Out-of-scope assets were sold to Asset Co in exchange for vendor notes, perpetual securities and a 10% equity stake, amounting to S$2.50/Keppel share.
  • Downgrade to ACCUMULATE with a lower TP of S$7.01, from S$7.21 previously. Keppel plans to announce further transformation plans in May which could include more monetization initiatives to reach its goal of S$17.5bn.



The Positives


+ Urban development led the charge with 16.7% gain in sales. Keppel Land recorded 72% higher home sales to S$740mn, underpinned by strong China (+2.8x  YoY to 830 units) and India (+1.8x YoY to 800 units). It has increased focus on trading projects, which have faster turnaround and require lower working capital. About S$280mn was raised from the disposal of 3 assets in the Philippines, Myanmar and Vietnam. We believe Keppel Land remains the key earnings driver. It accounted for 44.8% of FY22 net profit.


+ Higher sales of power, renewables and energy-related services under a subscription model. Energy and environment posted 3% growth in revenue to S$1.03bn. In addition to higher sales from power and renewable energy, Energy-as-a-Service (EaaS) offering has gained traction with > S$320m subscriptions secured. The tenure, however, is not disclosed. This covers services such as energy supply, cooling services, energy optimisation and analytics and electric vehicle charging. Renewable generation capacity grew 9% since end-2022 to 2.8GW, of which 65% is operational.


+ Disposal of Keppel Offshore and Marine resulted in a gain of S$3,300mn. It has also distributed S$3,845mn worth of SembCorp Marine shares (equivalent to S$2.19/Keppel shares) to its shareholders at end Feb. About 5% of SMM shares are still held in escrow, equivalent to S$0.237/Keppel share.


The Negatives


+ Net gearing has risen to 0.83x from 0.78x at end 2022, due also to lower total equity after the distribution-in-specie.

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