It’s been a period of uncertainty in global stock markets. But in Singapore, large companies are continuing to look to unlock shareholder value.
Keppel Corporation Limited (SGX: BN4) or simply known as KEP, has been in the news recently for its major reorganisation.
This fits nicely with its Vision 2030, aimed at driving its transformation from a conglomerate into a global alternative asset manager with deep operating capabilities.
In response, the share price of Keppel Corp gained by 4.5% in the two days after the announcement as investors and analysts welcomed the reorganisation and transformation plans.
For investors who are not familiar with Keppel, it is a Singaporean conglomerate that specialises in the property, infrastructure and asset management businesses.
With so much excitement, I’m here to help investors break down the key developments in this transformation plan.
Change of conglomerate structure into three platforms
In its reorganization, Keppel will transition to a horizontal business model featuring three dynamic platforms: Fund Management, Investment, and Operations.
These three platforms span across three key business segments, which includes infrastructure, real estate, and connectivity.
The Fund Management Platform aims to raise capital and establish robust investor relationships, while the Investment Platform focuses on strategic capital deployment to maximise investor value.
The Operations Platform unifies existing business units and optimises Keppel’s shared support functions to enhance synergy.
By adopting this streamlined structure, Keppel intends to dissolve its conglomerate identity and form a cohesive, integrated enterprise.
This transformation aligns with its vision of an asset-light approach that fosters healthy business synergies and drives success.
Keppel targets S$200 billion AUM by 2030, aims for doubling by 2026
Since announcing its Vision 2030 goals in May 2020, KEP has made significant strides, including divesting its Offshore and Marine business to Seatrium Limited (SGX: S51) and retaining a 5% stake.
The company is now updating its targets and aims to double its AUM to S$100 billion by 2026, from S$50 billion as of end-FY2022, before reaching its S$200 billion AUM target by 2030.
Keppel targets a 15% return on equity (ROE) by 2030, which is attainable by 2026 as the company seeks to replace irregular real estate development profits with more consistent income streams.
Keppel’s reorganisation into fund management, investment, and operating platforms to expand its AUM could also generate synergies within the group and optimise support functions, leading to anticipated cost savings of S$60-70 million per annum by 2026.
Asset monetisation to reach S$17.5 billion within seven years
As mentioned, Keppel is transforming into an asset light structure.
According to its management, Keppel will continue to monetise its assets, with a goal to reach an asset monetisation of S$10 billion to S$12 billion by the end of 2026.
This includes “unlocking value” from the group’s sizeable land bank.
This means that Keppel will require an additional of S$5-7 billion in divestments to reach its Vision 2030’s asset monetisation goal of S$17.5 billion.
Assuming that Keppel achieves its target of S$10-12 billion by 2026, the Vision 2030 target would be feasible since Keppel has managed to monetise about S$4.9 billion since 2020, which translated into around S$1.5 billion annually.
Focusing on recurring income
Starting with fiscal 2023’s first-half earnings, Keppel will implement a horizontal reporting structure to showcase its ability to capture diverse income streams through its revamped operating model.
This approach will highlight Keppel’s recurring income generation and emphasise the growth potential of its fee-based asset management division.
Additional disclosures will accompany the new reporting structure to help investors better understand and evaluate the company.
In FY2022, Keppel recorded a recurring profit of S$503 million, accounting for 60% of the year’s continuing profit.
This includes S$91 million from asset management fees and S$412 million from operating income sources, such as gas, electricity, and utilities sales; leasing income; operations and maintenance; facility and property management; and investment income.
With an additional S$170 million in annual interest income from vendor notes associated with legacy rigs transferred to Asset Co (the interim vehicle), Keppel’s recurring income could potentially increase to S$670 million in FY2023.
The steadier and growing recurring income stream will also provide visibility for Keppel’s dividend payout going forward.
Opportunity to accumulate the emerging global asset manager
The structural shift and transformation into a global asset manager provides an opportunity for long-term investors to accumulate.
With AUM expected to quadruple, Keppel could see strong growth in its fee income profits.
The company is also in a strong position to capitalise on the opportunities in renewables, decarbonisation solutions, sustainable urban renewal and connectivity given the rising support for these structural growth trends.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
