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).
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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.
This story appears in The Edge Singapore (Issue 892, week of July 29) which is on sale now. Subscribe here
