Keppel Corp and Sembcorp Industries have been one of the main culprit highlights in the recent oil bear scenario, which brings it’s share price down from the recent 5 year high of $11.57 to the low of $7.50.
Some readers have asked me whether Keppel is worth a buy at this price and I am pretty sure there are plenty who are considering to enter as well, given how “attractive” the last 5 years Keppel has bring to shareholders.
Personally speaking, I have not done an in-depth research of Keppel’s core business while my previous couple of posts on Sembcorp was because I have previously been vested with them. In any case, conglomerates are a bunch of different core business integrated together which can make it very difficult to value.
For the purpose of this posting, I’ll just do a simple sum of the parts method and if you are interested you can tweak from it.
Part A
The recent move to privatize Keppel Land means that Keppel Corp has now owned 95% of the properties arm.
This move has helped to mitigate the drop in earnings for its O&M segment, though the purchase would also increase its gearing from 0.11x to 0.42x.
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| Keppel Land |
For the purpose of this exercise, we’ll take an easy way out by valuing the value of the properties arm based on its privatization price at $4.38. Since Keppel owned 95% of the same, the market value for SOTP purpose is $4.16.
If you take a look at the upcoming projects they have up until 2017, I think this segment will be the main driver for the company while the other segments take a beating. That’s the advantage of being a conglomerates, having other segment to step up when the other is nursing its wound.
Part B
I’ve included both the infrastructure and investment in this segment.
This is the part most promising to the group and one of the trump card I reckon they are going to use during these recent years. For instance, they have divested a 51% stake in Keppel Cogen to its infrastructure trust while recycling its capital for other use. I’m pretty sure there will be a day when Sembcorp will follow suit with its utilities infrastructure trust but for now, they can only sit in envy.
Following the recent Q2 results, management has guided that revaluations, impairments and divestments (RID) remain a huge part of their recurring income, forming almost 21% of the annual PATMI for the past 5 years. Given the recent hit in the O&M earnings, I am pretty sure they will utilize this segment even more to sustain earnings in the future.
The SOTP for this segment is pretty straight forward by taking the market value of the individual listed entities, multiplied by the percentage holdings they owned. The market value for this segment is $2.27.
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| Infrastructure & Investments |
Part C
This is the hardest segment to value because this will be the hardest hit since they are related to the O&M.
For your information, the current EBITDA valuation based on the 2014 end year results for the O&M segment is at $5.55, based on 11x FY14 results. Obviously, you are not going to see that kind of number in the next few years as the sectors take a hit, so the million dollar question would be how much they are being valued.
I am actually taking a lazy way out by taking reference to the previous oil crisis low and replace the O&M margins to calculate my forecast PATMI for the next 5 years. Thus, for the purpose of this exercise, I have forecasted earnings for the next 5 years to drop 20%, 20%, 10%, and then stay constant for the next 2 years. The normalized PATMI for the next 5 years will go almost in half what they have in 2014. You can immediately see how bad it becomes.
Of course, I am playing only with the margins here and assuming order books remain the same. If the other variable factor of order books are also lowered, you can be sure that it will only get worse. Having said that, I’ve factored in quite possibly a very bad case scenario so the figures can be pretty conservative.
Other analysts are using a direct 11x EBITDA FY16 numbers, so their numbers are much higher than the one you see below because they are only accounting for the next one year forecast, and not the longer views that it may further drop.
The market value based on the below assumptions is $1.42.
Part D
This part is pretty direct and I am taking the available cash balance net the borrowings they had on their books.
The market value for this is -$2.77.
Summing up the total of (A) + (B) + (C) + (D), we get a total of $5.08.
Final Thoughts
This is just a very simple exercise to understand how much each segment are worth in the market but you can see how the group are playing out its other card when the other takes a hit.
If you believe that the O&M segment loss is temporary, then buying at current price could prove to be very worthwhile when oil price eventually recover. However, if you are those who wants further margin of safety before entering, then you can consider the impact of earnings the group can take.
Other major weight producers such as Exxonmobil and Chevron have taken a huge hit on their recent earnings and you can read their outlook for the next 5 years. The cut on jobs and capex are glaringly high so investors who want exposure to the oil industry needs to be mentally prepared that you can potentially sit on a huge paper loss for the next foreseeable years, unless some other segments can step up, like what we’ve seen for Keppel.
What I was trying to show here is that everyone thinks Keppel is “supposed” to be a $11 to $13 stock, but many forget that it is based on the assumptions that margins for their O&M segment are at the peak when the normalized oil price was above $100. If for the next decade, normalized oil is lowered to around $50 to $70, you can be sure that Keppel will be worth lesser than that. Suddenly, the new generation of investors will see Keppel as a $8 to $9 stock. So while the current price of $7.50 may look “cheap” to some investors out there, who thinks that mean reversion will take place in the longer term, you might want to ask if there are any margin of safety build in it.
What do you think? Is Keppel Corporation worth the buy at current price?
Hi B,
Thanks for the post.
Or maybe most of us is not interested if it is worth to buy, instead most want to know if I will make money if i buy Keppel now.
But the question of making money or likewise worth to buy is then when do you intend to sell?
So I think the question sometimes is back to ourselves.
I think it will be perfect for most readers if you can provide a your views of buying the stock now if they intend to sell :
A) in 6 months
B) in 1 year
C) 2 years
D) 3 years
E) 5 years
F) 10 years
Haha….
Hi Rolf
Hahaha for that, I will have to interview yours truly because there is no better person in the local blogosphere who can answer this question other than you 🙂
Please share share if you have first hand information k 😀
Hi B,
Thanks for your analysis. KC may not be good for short term, but should be good for long term. Oil is a depleting resource on the energy thirsty Earth, its price cannot be depressed for a very long time…
Cheers,
Farmer.
Hi Passive Income Farmer,
Agree that it is true, but i think oil will still be sufficient to meet the world's needs for the next couple decades or more, coupled with the improvement in technology for alternative energy resources (in the next decade) and you can see why oil is depressed (in my view).
Hi PIF
Yea, I agree with the anonymous reply.
While oil will still be a limited resource in our lifetime, the alternative energy are slowly gaining traction and one day it will lower the demand for oil. That being said, it is still a question whether we can go back to the days where oil price is above $100.
There is no real shortage of oil. Yes, it is finite, but so far the known reserves are firstly growing faster than the cumulative production and secondly add up to only about 1/5000th of the total volume stored somewhere on earth.
By the way that total volume was computed based on the solar energy that earth has received from the sun and converted into hyrdocarbons over the past billion years.
On the supply side the question is what is economically harvestable.
And on the demand side we do see a 'peak oil' forming already in developed countries. The demand is only growing in the developing countries.
Due to the huge CO2 emissions from oil and coal, humankind will move away from those energy sources and look for alternatives. The last few years solar and wind show the biggest growth rates. Compound those growth rates and in 10+ years we will have a totally different energy mix and a huge number of autonomous electrical cars that no longer depend on oil.
Does oil have a future under those premises?
Keppel Corp may transform to become Merlion with "Wings" or "Legs"?
Great company will have to transform itself or become extinct.
True that
better to bet against oil now, coz oil price is battered! Sure correct…
last year the same period, when oil price >100 I cannot remember any blogger or analyst is betting against it.
Guess whether finite with price rising or alternative energy, both are 50-50 right. No clear indication on who is more right as of now.
So I will take the analyst mindset, change to the side where the "water melon" are now!
When oil prices are low, it will not be good for countries that export oil. So I feel that it will come a point where OPEC, as a cartel which has huge influence on oil prices, will reduce its supply of oil once they drove out shale oil competitors who are not as efficient to stabilise the price of oil.
Hi there,
I think oil price may go back to close to $100 per barrel, unless alternative sources of fuel does manage to come out and prove reliable. other than that, as one expert believes, quoted from Bloomberg, oil price will be back to the $100ish levels by 2020.
PS. I think for fair comparison, should do with their competitors, so that one can judge for oneself how much better or worse Keppel has performed.
Hi,
The Saudis are going to attempt to bankrupt those USA Shale producers (financed through leveraged borrowings) by deliberately ensuring that oil prices remain low for now. This price drop will result in many of these shale producers learning the 'lesson' that Saudis are the one controlling the market, forcing them out of this business.
Reason being Saudi production of oil is $10-$15/ barrel whereas many shal's approaching $60-$70/barrel. These shal producers are unlikely to be able sustain this losing business and banks will end up not wanting to lend them money anymore.
Thus, we shall wait for the day when all these shal producers are forced out of this business and Saudis remain in control of the entire oil trade. That's the day when oil price will go up again.
How long? probably up to 5 years I guess.
Other than shale oil, I guess one of the other objective of OPEC is to hit hard at the alternative energy. The 100+ price of oil has actually started a lot of initiative and development of alternative energy. PV is a proven technology and the only issue is cost per watt which has come down considerably with the past development. This is a major threat to the oil producers. Oil producer is wary of that and so IMO, oil is unlikely to go back to the same old price level for a long time.
Your calculation assumes that, number of Keppel Corp share = number of its holding company shares. It's quite wrong.
Yea you are right. A friend of mine pointed to me as well and i hv recalculated them. It gets to a much lower price than what i had stated originally, around $3+
Hi B,
Keppel's price is close to your valuation now. I think most of us want to know whats your latest valuation of keppel as of current events.
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