It is full speed ahead for Keppel Corp’s BN4 transformation into an asset-light model and given how the share price has led gains among the STI component stocks year to date, it is clear CEO Loh Chin Hua has received the thumbs-up.
As part of this asset-light strategy, Keppel has set a target of divesting some $17.5 billion worth of assets and reinvesting the funds into building asset management platforms so that it can generate a bigger stream of recurring income and become less reliant on lumpy project earnings.
At its 1QFY2023 ended March business update call on April 20, Keppel says the divestment is ahead of schedule and a new interim target will be announced next month. “We expect to exceed the upper bound of the $3 billion–$5 billion range within the year, and will announce a new interim monetisation target shortly, with the final goal of reaching the full $17.5 billion announced earlier,” says Loh during the call.
Loh and Keppel’s chief financial officer (CFO) Chan Hon Chew note that the assets that have been monetised so far have “quite a good mix” with contributions from Keppel Land, infrastructure, the M1 assets of about $500 million and the Keppel Marina East Desalination Plant.
CGS-CIMB Research analysts Lim Siew Khee and Izabella Tan note that Keppel, having already monetised some $4.9 billion worth of assets since October 2020, is on track to exceed its $5 billion target for FY2023. As such, the FY2030 target of monetising all $17.5 billion is “likely to be brought forward”.
For the 1QFY2023 business update, Keppel chose to remain vague about its bottom line, saying only that net profit was “significantly higher” y-o-y, thanks to disposal gain of some $3.3 billion from its offshore and marine (O&M) business to Sembcorp Marine, which has named the new entity Seatrium with effect from April 27. If the exceptional gains were excluded, earnings were only up “slightly higher” y-o-y. Its revenue, meanwhile, was up 9% y-o-y to $2.26 billion.
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In her April 24 note, PhillipCapital analyst Peggy Mak points out that excluding the divested O&M, Keppel’s revenue for the 1QFY2023 only rose at a marginal 3% y-o-y. Keppel’s net gearing has increased, reaching 0.83x as at March 31, up from 0.78x as at Dec 31, 2022, due in part to its lower total equity after the distribution-in-specie of Sembcorp Marine shares during the merger, notes Mak, who has downgraded the brokerage’s call to “accumulate” along with a reduced $7.01 price target from $7.21.
One upside catalyst, Mak notes, can be from an earlier divestment of Keppel’s assets held at Asset Co, the entity set up to hold Keppel’s so-called legacy assets. This could lead to the earlier redemption of vendor notes and perpetual securities. During the disposal of Keppel O&M, out-of-scope assets were sold to the Asset Co in exchange for the vendor notes, perpetual securities and a 10% stake amounting to around $2.50 per Keppel share. An early release of the 5% of Sembcorp Marine shares that are still held in escrow is also another catalyst, with both events generating cash flow leading to lower gearing for Keppel, says Mak.
Citi Research analyst Brandon Lee is more positive on Keppel, noting that the company is “executing well on” and “strongly committed to” its strategy to pivot away from its “lumpy” property development business.
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Lee, who has a “buy” call and $7.51 target price on this stock, expects Keppel’s NAV discount to narrow, citing the example of its closest SGX-listed asset management peer, CapitaLand Investment (CLI), which received an uplift in its P/B to trade at 1.3x currently from its average of 1.0x to 1.2x previously after shedding its property development business. “We believe Keppel would need to entirely divest or further lighten its property development business to trade closer to CLI,” says Lee.
In a clear demonstration of its intent to grow via an asset management platform, Keppel has laid down a target to have an AUM of $200 billion by 2030 — up from just $50 billion now. When challenged at the call by JP Morgan’s Mervin Song who described this target as “very ambitious”, Loh says this target is “very feasible”.
“With the deep operating capabilities that we have, we believe that we are in a good position to achieve this target by 2030. We will of course consider both organic as well as inorganic options,” adds Loh.
Overall, analysts like what they see happening at Keppel. According to Bloomberg’s compilation of sell-side calls, eight of the analysts tracked have either a “buy” or equivalent call, with UOB Kay Hian being the most bullish with Adrian Loh’s target price of $9.10.
The lone equal weight call is from Mayank Maheshwari of Morgan Stanley, whose target price is $6.15. CLSA’s Low Horng Han, meanwhile, is advising investors to “reduce” this stock. He has a $6.10 target price.
Keppel shares, taking into account the Sembcorp Marine distribution, have given shareholders a return of 34.66% year to date. It closed at $6.37 on April 26.
