Better returns for Keppel, Sembcorp following portfolio overhauls, strategic shifts

STRATEGIC reviews tend to be hit-or-miss for corporations – and their investors. But the transformation of Keppel and Sembcorp Industries appears to have paid off so far for the two former oil-and-gas bigwigs.

Their respective revamps first surfaced in June 2021, as they explored the combination of their offshore and marine (O&M) units, after Keppel unveiled its plans to exit the rig business and pivot to clean energy.  

The deal was completed in February 2023, but both companies had more strategic changes up their sleeves. 

In May 2023, Keppel said it would transform itself from a conglomerate to a global alternative asset manager. The company set itself a target of S$100 billion in assets under management and a cumulative asset monetisation target of S$10-12 billion by end-2026. 

Not to be outdone, Sembcorp in November 2023 announced a five-year strategic plan that would see it make a S$10.5 billion investment in renewables, in a bid to grow its gross installed renewable capacity and halve its emission intensity by 2028.

These moves were well-received by the local stock market. 

Singapore Exchange market strategist Geoff Howie noted that the two counters each booked symmetrical gains of 61 per cent in 2023. They also kicked off 2024 at “significant premiums” to their average five-year price-to-book valuations, he said. 

Across the broader market, Howie noted that between 10 and 15 per cent of last year’s average daily turnover on the Singapore stock market was directed to businesses pursuing pivots to sustainable solutions. 

“Green and sustainable investments can be found in many different industries, as over time all industries need to move towards net zero by 2050,” he said. “Investors can analyse whether the companies have credible transition plans to pivot their capital expenditure and asset base towards low-carbon production capacity.”

Walking the talk

Much of the optimism around these two stocks has been due to their corporate actions, including their acquisition of assets related to renewables such as wind and solar, as well as the disposal of their non-core assets.

In its full-year financial results announced on Feb 1, Keppel said its renewables portfolio grew 54 per cent to about 4 gigawatts (GW) from 2.6 GW as at end-2022. The remaining 1.9 GW of the company’s energy portfolio constituted gas. 

Some recent noteworthy corporate actions by Keppel – that have served well to transform its portfolio – include the acquisition of European real estate manager Aermont Capital in two tranches, the acquisition of Wevolve by a fund managed by Keppel, as well as Keppel Infrastructure’s move to buy a stake in a solar portfolio from German renewable energy company Enpal. 

Similarly, Sembcorp said in its full-year financial results announcement on Feb 20 that its gross renewables capacity stood at 13.8 GW, versus 9.8 GW in 2022. The company is also aiming to hit 25 GW of gross installed capacity by 2028. 

Sembcorp has also undertaken acquisitions to speed up its shift to renewables. It forked out S$200 million in November last year to acquire wind assets in India and China, and bought majority interests in various units of Vietnamese industrial production and infrastructure company Gelex Group. 

These acquisitions have, at least in part, contributed to higher returns to shareholders. Keppel and Sembcorp have delivered total returns of 142.3 per cent and 165.8 per cent to shareholders, respectively, since Jun 25, 2021, when talks of the merger were first announced. 

Over the past year, Keppel has delivered total returns of 45.1 per cent to shareholders, while Sembcorp has delivered 29.8 per cent. 

The stock prices of both counters have also seen a lift, on the back of their active shifts to cleaner and greener portfolios. Shares of Keppel have risen 38.1 per cent over the past year, while Sembcorp shares are up 26.3 per cent. 

Stronger financials boost market confidence

For the second half of the fiscal year ended December, Keppel’s net profit inched up 2.5 per cent to S$439.9 million, taking the group’s full-year earnings to a record high of S$4.1 billion. The full-year profit was due partially to gains the group booked from the major sale of Keppel O&M. 

All three of Keppel’s business segments were profitable, with the infrastructure and connectivity segments recording revenue gains, while contributions from the real estate segment fell. 

Keppel’s board also proposed a final dividend of S$0.19 per share for FY2023, up from S$0.18 in the prior year. This took the group’s total cash dividend for FY2023 to S$0.34 per share. 

Sembcorp posted a 15 per cent rise in H2 earnings to S$412 million due to higher contributions from the gas and related services, as well as the renewables segments. The stronger bottom-line showing came despite a 14 per cent decline in revenue to S$3.4 billion, on the back of lower gas prices, as well as lower power prices from the gas and related services segment. 

Sembcorp proposed a final dividend of S$0.08 per share for FY2023, double its final dividend of S$0.04 in FY2022. Sembcorp’s top executives have also guided for higher dividend payouts and earnings as the group now has a bigger earnings base. 

Analysts have also cheered the moves of both companies. Based on Bloomberg data, Keppel has 10 “buy” calls from a total of 13 analysts that have coverage on the counter. Sembcorp has 11 “buy” calls out of a total of 12 analysts’ ratings.

Phillip Securities analyst Peggy Mak noted that Keppel could benefit from a lower interest-rate environment, which could rejuvenate mergers and acquisition activity for the group. She added that an increase in fundraising activity would also lift its funds under management. 

Meanwhile, DBS analyst Ho Pei Hwa noted that Sembcorp is “uniquely positioned in the energy-transition drive with a full suite of competitive and green energy solutions”. 

While Sembcorp’s earnings may have peaked in the near-term on the back of lower power prices and higher funding costs, Maybank’s Krishna Guha said higher renewable revenue could partially offset the drag on the group’s FY2024 earnings.