Keppel Corp (KEP SP)
The Beginning Of The End Of Its Upstream Foray
KrisEnergy’s submission to wind itself up should not come as a surprise. With KEP having appointed receivers, the key issue over the next year is to see if KrisEnergy’s upstream assets will be successfully sold. With the bulk of these being exploration assets, our channel checks indicate that the sale process will be challenging. KEP will book a loss of S$318m at its 1H21 results, offset somewhat by a gain in the sale of its Floatel stake. Maintain BUY. Target price: S$6.37.
•Finally falling over. On 4 June after market close, KrisEnergy (KE) announced that it had submitted a winding up petition due to: a) lack of funds, b) its liabilities being greater than its assets, and c) the much lower-than-expected cash flow coming in from its new oil field offshore Cambodia. This should not be a surprise to the market as KE had already flagged to the market on 28 April and 31 March about the problems offshore Cambodia and the risk to the company ceasing to be a going concern. In addition, we had highlighted this as a risk in our 1Q21 business update commentary on 22 April. Yesterday, prior to market opening, Keppel (KEP) announced that it had appointed Borelli Walsh as receivers over KE’s assets.
•What now? Given that KEP has first-ranking security over KE’s assets, it will look to sell these over the next few quarters, helped in some respect by oil prices: spot Brent has risen 39% ytd to over US$70/bbl while the forward Brent contract for delivery in Dec 25 has risen 23% in the past six months to US$59.21/bbl. However, our channel checks within our oil & gas industry contacts indicate that the majority of KE’s assets may be difficult to divest with only its Block 9 gas field onshore Bangladesh seen as valuable.
•Near-term impact. For its upcoming 1H results, the company will book a S$318m loss against its exposure of S$432m based on its investment, contract asset and loan receivables, as well as the amount outstanding under the Revolving Credit Facility. KEP stated that it was unable to break down the S$318m loss at present but more details will be provided at its 1H21 results in late Jul 21. Slightly offsetting the impairment loss is KEP’s previously-announced S$187m gain arising from the sale of its stake in Floatel.
•Dividends not expected to be affected. In the announcement, KEP stated that 2021 dividends will be unaffected as it will ringfence the impairment loss on this non-core investment. We have kept our DPS unchanged at S$0.12/share for 2021.
•Potentially problematic sale. Looking at the chart below detailing KE’s assets, it is evident that the bulk of them are exploration rather than production assets, and thus their value could be forced down in a liquidation sale such as this, in our view. According to our channel checks, KE’s key asset appears to be the Block 9 gas field onshore Bangladesh which currently produces c.100mmcf/day of gas and 290bpd of condensate and this is cashflow positive. The latest data as at end-Dec 19 showed 2P working interest reserves of 75.5bcf of gas and 200,000bbl of condensate; however this would have been reduced by end-20 due to production.
•We have lowered earnings for 2021 by 19% to S$435m as a result of the KrisEnergy-related losses, which has been offset by the gain in the sale of KEP’s stake in Floatel. Our earnings estimates for 2022-23 are unchanged.
•We retain our BUY rating on KEP. Our SOTP-based target price of S$6.37 is unchanged as it is based on target P/B multiples for its various business segments. The company’s share price currently trades at -1SD below its five-year average P/B of 1.0x which we view as undemanding. Should regional economies continue to recover well from the COVID-19 pandemic in 2021, we believe that this gap can narrow in the coming quarters.
•Better newsflow to look forward to. Going forward, KEP’s China property segment should see better sales volume on a yoy basis given the low base in 1H20. In 1Q21, we witnessed a 2.5x yoy increase in home sales value to S$1.55b while 2Q21 continues to report strong numbers due to the proceeds from the divestment of Keppel Bay Tower as well as the sale of a commercial/industrial plot at Tianjin Eco City. In addition, its infrastructure segment will have a full half-year of contribution in 1H21 from the Marina East desalination plant which started operations in Jun 20, while potential upside may come from KEP building upon the recent order win for a US$2.3b FPSO from Petrobras in May 21.
SHARE PRICE CATALYST
• Earnings-accretive acquisitions in the property space in China and Vietnam.
• Successful sale of the company’s drilling rigs.
• 5G rollout in conjunction with StarHub in mid-21
BUY by UOB Kay Hian Research. Share price closed at $5.21.