Could Keppel’s structure reorganisation lead to property arm spin-off?
With seven years left to go towards Keppel Corp’s Vision 2030 plans, the group has embarked on its next phase to further transform itself into a global alternative real asset manager, not unlike the real estate investment managers that the local market is familiar with.
On May 3, Keppel announced that it would be removing its conglomerate structure and simplifying its organisation into a horizontally integrated model built around three platforms: a fund management platform, an investment platform and an operating platform. Keppel runs separate operations for its various business units in the energy and environment, urban development and connectivity fields.
The fund management platform will focus on raising capital and strengthening investor relationships. The investment platform will drive capital deployment decisions and bring together investment and value enhancement expertise across the group. Finally, the operating platform will integrate all of Keppel’s existing business units under one platform, where the company will bring its engineering and project management expertise to bear and add value.
“This latest restructuring reflects a fundamental shift in how we organise ourselves to operate in a nimbler manner and harness technology to grow at speed and scale,” says Keppel Corp CEO Loh Chin Hua.
He also noted the group’s “strong track record” in developing and operating real assets such as renewables, clean energy, decarbonisation and environmental management solutions, green buildings, and digital connectivity infrastructure.
“[These] not only generate recurring income and cash flows but also contribute to sustainable development,” he says. “Amidst a volatile international environment, we see a growing pool of investors… wanting to allocate more capital to alternative assets, which can serve as a hedge against inflation. With our strong capabilities in these areas, Keppel is in the right space at the right time, where we can play to our strengths.”
Keppel’s new organisational structure places it in the same camp as a group of real estate investment managers collectively dubbed the Bs, C and E — CapitaLand Investment (CLI), ESR Group, Brookfield, Blackstone and Blackrock.
The difference between Keppel and the Bs, C and E is that Keppel has a broader range of real estate and associated assets such as townships, infrastructure, and digital assets. Like the Bs, C and E, Keppel has three segments: fee income; the investment platform, where Keppel takes stakes in funds and joint ventures with capital partners; and the operating platform, such as CLI’s Ascott. As such, its income generation appears simpler than CLI’s, which includes fee-related earnings (FRE) from funds under management (FUM), FRE from lodging management (LM), and the ratio of FM FRE/FUM in its reports.
Naturally, the new structure comes with its own set of risks. For example, the reliance on the growth of assets under management (AUM) exposes Keppel more to the volatility of the capital and financial markets. Besides broader factors such as interest rates, Keppel’s capital partners might not always share the same appetite all the time. Keppel’s own various listed entities might be exposed to their own structural issues as the market evolves, too.
‘Bold and ambitious’
Loh candidly acknowledges that the goal is “bold and ambitious”. Yet, having started the strategic
shift a few years back, he is confident it is “well within” Keppel’s means to execute its strategy. “If this transformation had been contemplated five years ago, it would’ve been a big ask. If you look even further back, to maybe 10 years ago, Keppel was even more entrenched as a conglomerate. It is a big sign of how far we have progressed.”
He points out that restructuring and re-organising is something Keppel has done constantly over the years. The company started as Keppel Shipyard in 1968 before expanding into offshore rigs in the 1970s. Along the way, it added banking, logistics, telecommunications and real estate. It has bought and built, but it has sold as well. Its much-vaunted Keppel Offshore and Marine (Keppel O&M) has recently merged with Sembcorp Marine, and the combined entity renamed as Seatrium.
Under its operating platform, Keppel’s three segments — OneInfrastructure, OneReal Estate and OneConnectivity — will run end-to-end across the value chain. This means Keppel will centralise support functions that will help grow AUM without each unit incurring overheads in tandem. By simplifying the structure, Keppel aims for annual savings of $60 million to $70 million by 2026. Keppel’s margins should also improve over time, adds Loh.
Based on Keppel’s FY2022 net profit, OneInfrastructure contributed about 32% to its overall profit, while OneReal Estate and OneConnectivity contributed about 50% and 11%, respectively.
New interim targets
As part of the reorganisation, Keppel has laid new interim targets for its AUM and asset monetisation programme. By the end of 2026, Keppel aims to monetise a cumulative total of $10 billion to $12 billion worth of assets — up from $4.9 billion already monetised thus far — and to hit $17.5 billion by 2030. In addition, Keppel, which now has an AUM of $50 billion, aims to reach an interim AUM of $100 billion by the end of 2026 and eventually hit $200 billion by 2030 while generating an ROE of 15%.
Loh clarifies that the $17.5 billion in assets eventually monetised does not include operating platforms. The recent spin-off of Keppel O&M and distribution in specie to its shareholders were also not included in the amount that the group has monetised so far, as these were not part of the original assets first identified. However, Loh did not specify what is on the to-sell list, other than saying he is “quite agnostic” about that, the sales will be in “flights”, and the potential sales will be held back if the market at the point in time is not favourable.
A potential chunk of assets may come from the “not insignificant” landbank Keppel holds in various markets, including China. “I love the landbank because it is really of value. So it is not that I do not like it. It just does not quite fit with what we are trying to do. But until it is monetised, the landbank sits on the balance sheet, produces no income, and has a lot of overhead costs,” says Loh, adding that Keppel’s returns can be improved if proceeds from monetising the land can be reinvested and generate recurring income.
Some market observers wonder if Keppel could list its property arm as either Keppel Land, which it privatised back in 2015, or some other entity, either on the Singapore Exchange or one of the North Asian bourses.
Analysts positive on transformation and interim goals
Keppel’s latest reaffirmation of its new strategy has received a thumbs-up from some analysts. “Given its access to capital and faster capital recycling, Keppel can scale up and drive its growth without relying just on its balance sheet, which enables it to expedite the achievement of its 15% ROE target,” write Citi analysts Brandon Lee and Jame Osman, who have kept their “buy” call and $7.51 price target.
“We think investors will warm up to Keppel’s transformation plans,” write CGS-CIMB analysts Lim Siew Khee and Izabella Tan in their May 3 note, as they keep their “add” call and $8.70 price target. They believe that Keppel’s new interim target of monetising another $5 billion to $7 billion worth of assets by 2026, and $17.5 billion by 2030, is achievable. That is a rate of between $1.25 billion and $1.75 billion per annum, which seems feasible as Keppel has already been achieving this rate since 2020.
“We think it could achieve this by FY2026 as Keppel plans to replace lumpy real estate development profits [which came up to $177 million in FY2021] with more recurring income,” the analysts add.
In FY2022 ended Dec 31, 2022, Keppel reported a recurring profit of $503 million, or 60% of the year’s continuing profit. Of the $503 million, $91 million was from asset management fees while $412 million came from operating income such as the sale of gas, electricity, utilities; leasing income; operations and maintenance; facility and property management; and investment income.
“With the new stream of interest income from vendor notes of $170 million annually from the legacy rigs transferred to Asset Co [the interim vehicle], Keppel’s recurring income could expand to $670 million in FY2023,” they write.
“Applying a 15-times P/E in FY2023, one can value Keppel’s recurring income at $10 billion. This is not pricing in any mark-to-market gains and asset monetisation or engineering, procurement and construction (EPC) and development profits ([of around] $356 million in FY2022). Urban development net assets stood at $5.6 billion at end-FY2022,” they add.
EY, the independent valuer engaged by Keppel in the valuation exercise, has valued Keppel at around $14 billion to $19 billion or an equity value per share of $7.87 to $10.69.
According to Keppel, the latest reorganisation will be progressively implemented over the next 12 to 18 months and reflected in its financial results for the 1HFY2023 ending June. The next set of results will come with additional disclosures to help the market better understand and value the company.
“It is a very comprehensive exercise. Keppel has existed in this manner for many decades, so it takes quite a bit of time for us to look at how Keppel is organised, including our legal structures and internal processes. When we work as an integrated business, we will look at how we can share data and create data lakes that cut across the whole horizontal rather than work as silos,” says Loh.
In the year to date, Keppel is already the STI component stock that has given shareholders the most returns of more than 35%. Evidently, that is not good enough for Loh. “I think having a conglomerate structure does not necessarily help us. It gives analysts another reason to value us as a conglomerate and give a conglomerate discount. So, we want to change that.”