(July 29): In April, when Keppel Corp announced its 1QFY2019 results, its group CEO Loh Chin Hua revealed some statistics on its wholly-owned property subsidiary, Keppel Land. “At the end of 2018, we calculated the [revalued net asset value] of Keppel Land to be about $10.3 billion, or $5.68 for each share of Keppel Corp. This does not include the Keppel Group’s 45% stake in Sino-Singapore Tianjin Eco-City Investment and Development Co, which has an RNAV of about $1.2 billion, or $0.66 for each share of Keppel Corp,” Loh said. That works out to $6.34, just 20 cents below Keppel Corp’s last trading price of $6.54.
The RNAV of Keppel Corp’s property units clearly does not include its other businesses such as Keppel O&M, Keppel Infrastructure (and Keppel Infrastructure Trust, or KIT), the recently privatised Keppel T&T and its real estate investment trust, Keppel DC REIT, and Keppel Capital and its REITs and Alpha Investment Partners funds. Of course, Keppel Corp also owns significant stakes in troubled entities such as KrisEnergy, an oil exploration company, and Dyna-Mac Holdings, which builds topsides for rigs.
As at June 30, Keppel Corp’s book net asset value stood at $6.12 per share and net tangible assets (excluding goodwill and intangibles) were $5.17 per share. Keppel Corp is trading near its NAV, and, if analysts are to be believed (see Table 1), well below its price target.
Before rushing out to buy Keppel Corp, consider its prospects.
Based on our computations (see Table 2), Keppel Corp is valued at $6.95 per share, suggesting limited upside. Its property valuation, including Keppel REIT and Tianjin Eco-City, amounts to $7.24 per share (see Table 3).
Keppel Infrastructure, including KIT, is worth $1.79 (see Table 4). The investments division (see Table 5), which comprises Keppel Capital, M1 and the listed investments, would be worth $1.33 per share, and this is being very generous. -KrisEnergy, which was recapitalised in 2016, is still overwhelmed by a $635.7 million pile of debt. On the other hand, Keppel Capital is the source of annuity-type growing fee income. On July 19, Prime US REIT started trading. Keppel Capital holds a 30% stake in Prime US REIT’s manager, and 7.99% in the REIT.
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Property is largest contributor
In hindsight, privatising Keppel Land was a visionary move. “We privatised Keppel Land for about $3.1 billion in 2015. Since then, we have recognised total net profit of about $2.9 billion from Keppel Land, compared with $1.6 billion if we had just retained our 55% share of the company. With full ownership, we have transformed Keppel Land into a multi-faceted real estate company, right-sized its property book and actively recycled capital to seek new opportunities and higher returns. Keppel Land has been the largest contributor to the group for the past four years,” Loh said in April.
In 2QFY2019, Keppel Land continued to be the group’s largest contributor, accounting for around ¾ of Keppel Corp’s net profit. The group’s net profit declined 39% to $356 million in 1HFY2019, mainly owing to the absence of one-off en-bloc sales that occurred in 1HFY2018. Free cash flow of $873 million in 1HFY2018 reversed into negative free cash flow of $614 million in 1HFY2019.
Murky outlook for global growth
Keppel O&M, once the largest builder of jack-up rigs, has experienced a challenging four years. In 1HFY2019, it made a $10 million profit. This division has moved away from building just rigs to building infrastructure for bridging fuels such as liquefied natural gas (LNG) and renewable energy. Close to 60% of the new orders are for LNG and renewables related projects (see Table 6). Among the new contracts secured this year were offshore wind projects worth about $720 million from -TenneT Offshore for the design, construction and installation of two converter stations servicing offshore wind farms in the German sector of the North Sea, as well as two offshore wind farm stations from Orsted, for Taiwan.
Keppel O&M’s net order book rose to $5.45 billion as at end-June 2019, excluding the projects for Sete Brasil (which is undergoing a restructuring scheme). “This is the highest that our net order book has been since 2016, when we first excluded the Sete rigs from our order book,” Loh said on July 18.
The valuation of Keppel O&M is based on the cash flow for the next four years from its projects, valuing this division at $2.56 (see Table 7). However, if Keppel O&M is able to garner more renewable and LNG contracts this year, the valuation of this segment could rise. That is the wild card.
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The International Monetary Fund recently lowered its global growth forecast to 3.1% for this year and 3.5% for next year, both 0.1 percentage point lower than in its April projection. Loh has also cautioned that the external environment is fraught with risk. “The global economic environment has turned more sombre in recent months, with trade tensions between the world’s largest economies, slowing global trade and growth, and falling investments on the back of declining business confidence. …If tensions were to worsen, and the international supply chain and technology access threaten to bifurcate, this could have a significant impact on the international economic and operating environment,” he warned on July 18.
In such an environment, although valuations appear undemanding (see Chart 2), investors may feel that discretion is the better part of valour.
