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Keppel gets boost from property, as O&M division continues to grapple with slowdown

Thiveyen Kathirrasan
Thiveyen Kathirrasan • 6 min read
Keppel gets boost from property, as O&M division continues to grapple with slowdown
SINGAPORE (Jan 28): Keppel Corp, once the world’s largest jack-up rig builder, has still not recovered from the offshore and marine slump. Its O&M division continued to make a loss last year. For FY2018, Keppel Corp announced a net profit of $944 millio
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SINGAPORE (Jan 28): Keppel Corp, once the world’s largest jack-up rig builder, has still not recovered from the offshore and marine slump. Its O&M division continued to make a loss last year. For FY2018, Keppel Corp announced a net profit of $944 million, up 382% from $196 million in 2017, or up 16% from $815 million, excluding the one-off penalty of $619 million for global resolution with the authorities in the US, Brazil and Singapore. Property was the biggest earnings contributor for the fourth consecutive year. Keppel O&M incurred a small loss of $6 million for FY2018, because of $167 million additional provision for losses on semi-subs for Sete Brasil and $32 million impairments on other assets in 4QFY2018.

Capex cuts by the oil majors, coupled with the write-downs from Sete Brasil, continued to impact Keppel O&M’s profitability. Keppel O&M’s profit before tax has been falling since late 2014 (see Chart 1).

Within Keppel O&M, orders for its world-class jack-up rigs trickled in, and the division was buoyed by conversions and liquefied natural gas (LNG) carriers.

Looking to LNG for earnings

In the next 10 years or so, LNG will be playing a role as a bridge fuel as the world moves from fossil fuels to renewables. As a result, LNG is likely to be a major beneficiary of the climate change agenda to contain the global rise in temperature to below 2ºC, and to battle air pollution in economies such as China and India.

Rigzone, quoting energy consultants Wood Mackenzie, says uncontracted demand by the world’s seven largest LNG buyers could quadruple from 20 million tonnes currently to 80 million tonnes by 2030. According to Bloomberg New Energy Finance, by 2030, global LNG demand will reach 450 million tonnes.

Expanding its involvement in the LNG space, Keppel O&M has signed a Technical Assistance and License Agreement with Gaztransport & Technigaz to jointly market LNG solutions, leveraging GTT’s membrane containment systems and Keppel’s expertise in specialised shipbuilding and LNG solutions. Keppel O&M has also delivered its second dual-fuel LNG tug, this time to Maju Maritime, with a perfect safety record. Already, for FY2018, out of its $4.3 billion O&M order book, $2.1 billion are for Floating Production Storage and Offloading vessels (FPSOs) and floating LNG facilities (FLNGs).

Last December, Keppel O&M signed two additional contracts with Stolt-Nielsen to build two more small-scale LNG carriers worth a total of about $105 million. Keppel O&M also announced that it was starting early conversion works on the Gimi FLNG for Golar LNG, which will be over a period of up to four months. The contract is worth up to $50 million.

Also in December, Keppel O&M announced a $300 million order for the design and construction of an ice-class LNG bunker vessel, refurbishment of an FPSO and 65 scrubber retrofit projects.

Keppel Corp could continue to benefit from orders for scrubber retrofits and LNGfuelled vessels, as the International Maritime Organisation implements the 0.5% global sulphur cap on marine fuel from January 2020, its management said.

Property to support earnings

Since the privatisation of Keppel Land in 2015, property has been the main driver of earnings for the group (see Chart 1). For FY2018, earnings from the property division contributed $938 million to net profit. During the year, Keppel Corp sold around 4,440 units, with total sales amounting to $1.8 billion.

Some $2.7 billion from the sale of 8,410 overseas units will be recognised from 2019 to 2021. In the meantime, 19,000 units are launch-ready from 2019 to 2021.

Keppel Corp has a substantial landbank that it can sell to boost earnings. In Singapore, it has saleable gross floor area of 1.48 million sq ft; in China, 3.03 million sq m; and in Vietnam, 2.28 million sq m.

Attempts to privatise KT&T, M1

Last September, Keppel Corp, together with Singapore Press Holdings, made a pre-conditional offer for M1 at $2.06 a share. The rationale for the offer is to achieve majority control to be better able to support M1’s transformation while providing complementary services to Keppel’s mission as a solutions provider for urbanisation. According to circulars to shareholders, the acquisition is earnings-accretive.

Separately, Keppel Corp also made a privatisation offer for Keppel Telecommunications & Transportation via a scheme of arrangement at $1.91 a share. Keppel Corp holds a 79.22% stake in Keppel T&T, and had previously attempted to privatise the latter in 2001 via a scheme of arrangement. If approved, the transaction is expected to cost $225 million and be funded through debt. Based on 2017 pro-forma, the privatisation of Keppel T&T could boost earnings per share by 0.3 cent, while raising gearing to 0.49 times, a Deutsche Bank report estimates.

Investors need to hold on for the long term

Keppel Corp’s conglomerate structure has advantages and disadvantages. Its diversification helps to stabilise earnings, given that both O&M and property earnings can be lumpy. Keppel O&M is no longer the largest contributor to Keppel Corp’s earnings, having been overtaken by the property division. Keppel Corp is also sponsor to three real estate investment trusts and a business trust, and Keppel Capital, its fund management arm, has assets under management of $29 billion.

A popular valuation method for conglomerates is sum of the parts (SOTP) valuation, by which Keppel Corp is valued at $6.06. Here, a discount rate is assigned to the O&M sector to obtain a net present value using the discounted cash flow (DCF) method. The infrastructure division is also valued using a multiple of price-to-book. The property segment is valued based on the revalued net asset value (RNAV) for the landbank and unsold properties for residential projects; while the development cost is used for commercial projects. Investment properties are valued based on the market value of the properties, and its listed units are valued based on Keppel Corp’s effective stake (see table).

In addition, our in-house divergence analysis (Chart 2) indicates Keppel Corp appears to be slightly overvalued.

The margin of safety analysis, which discounts the individual assets of the company based on their quality and risk, also indicates that the stock is fairly valued. Based on this metric, the fair value of the company’s share is $6.06. Without the discounting, the net asset value per share is $6.73, while the net tangible assets per share is $6.66. Yield analysis gives a mixed picture, with dividends and earnings yields attractively priced, but investors are paying a premium for the business, as evidenced by the poor yields in Chart 3.

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