Keppel: No Major Surprises in Business Update; Shares Undervalued

We see no major surprises in no-moat Keppel’s BN4 first-quarter 2023 business update and keep our fair value estimate of SGD 7. While no detailed financial numbers are given, first-quarter net profit (excluding the SGD 3.3-billion disposal gain from the combination of Keppel Offshore & Marine and Sembcorp Marine) improved slightly year on year, due to better performance of the energy and environment, urban development, and connectivity segments. We believe Keppel remains undervalued, and a positive share price catalyst could come from the update of its transformation plans (including a new interim asset monetization target) in May.

We think a highlight of the update is the progress of the asset monetization program, which has already exceeded SGD 4.9 billion since October 2020 and would beat the SGD 5 billion target by the end of 2023. In addition, Keppel’s home sales in China increased by 280% year on year to 830 units in the first quarter of 2023, following the lifting of COVID-19 restrictions and more supportive government policies. Meanwhile, despite the sale of the offshore and marine business, Keppel still has exposure to some legacy rigs and the associated receivables through Asset Co. Given the improving offshore rig market, the monetization of the legacy rigs may take place sooner, leading to an earlier repayment of the vendor notes issued by Asset Co. Keppel will benefit from a 5% redemption premium of the outstanding principal amount when the vendor notes are redeemed.

We think Keppel’s goals to transform into a global asset manager and focus on recurring income will continue to underpin the firm’s future earnings. The asset-management division aims to increase assets under management to SGD 200 billion by 2030 from the current SGD 50 billion, while the urban development segment is investing in the senior living business.