Keppel Corporation has made two moves in the last two weeks, first a $380 million deal for 800 Super Holdings Limited and now announcing its intentions to build Singapore’s first hydrogen-ready power plant.
Let us review these announcements and take a glance at Keppel’s future.
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Acquisition of 800 Super Holdings Limited
To begin, Keppel, through its subsidiaries Keppel Infrastructure and Keppel Capital (Keppel Asia Infrastructure Fund), is acquiring an 80% interest in 800 Super Holdings Limited, a Singaporean environmental services company. This acquisition will cost Keppel a total of S$304 million and is slated to finalize in the fourth quarter of 2022.
So, what’s the big deal? What does 800 Super Holdings Limited do?
800 Super is a well-established Singaporean provider of environmental services to the public and commercial sectors, with four primary operating segments: waste management, waste treatment, integrated public cleaning, and other environmental services. 800 Super is also one of three licensed public garbage collectors in Singapore, offering municipal rubbish collection services, as well as one of four service providers appointed by the NEA to provide integrated public cleaning services, which include cleaning of public roads and other public places.
This acquisition was done because the Keppel consortium feels that 800 Super will be a valuable addition to the Keppel Group. 800 Super is well positioned to realize its market potential by unlocking untapped capacity in its waste treatment segment to meet rising industry demand. More importantly, it is hoped that this acquisition will enable the firm to strive towards Keppel’s Vision 2030 ambition.
But is this worthwhile in terms of synergy and development pipeline?
On the surface, 800 Super appears to be a promising fit with the breadth of environmental services offered by Keppel Infrastructure, allowing for operational synergies and the enhancement of the two firms’ competitive advantages.
With three licensed operators, ALBA W&H Smart City Pte Ltd, SembWaste Pte Ltd, and 800 Super Waste Management Ptd Ltd, designated by NEA as Public waste collectors (PWCs), I would assume Keppel’s venture will face little competition.
Nonetheless, no competition does not imply good business. Historically, if we look at Sembcorp as a model, we should not expect significant growth in this market. Yes, you do get to stabilize your revenues because the amount of waste treatment activity in good or bad times does not fluctuate considerably. However, because the country is so small, expansion is limited.
Overall, I believe the acquisition of 800 Super Waste Management is in line with the company’s goal of expanding recurring income, but I do not anticipate significant growth.
Valuation-wise, 800 Super Waste Management, which was last valued at S$74.3 million on 30 June 2022, has a price-to-book value of 5.11 (Given the current acquisition cost). As references, Keppel Corporation’s PB is around 1.02, while Sembcorp Industries’ PB is around 1.40. While this is hardly an apples-to-apples comparison because waste management is merely a subsegment of Sembcorp Industries, it conveys the impression that there may be a premium paid for this business.
Singapore’s first hydrogen-ready power plant
Following that, Keppel Corporation announced plans to build Singapore’s first hydrogen-ready power plant through its subsidiary Keppel Energy.
The Keppel Sakra Cogen Plant’s total investment is projected to be over S$750 million. This plant, which is expected to be finished in 1H 2026, will be the most cutting-edge and energy-efficient power plant in Singapore, resulting in superior performance, such as reduced emission intensity and greater operational flexibility.
In line with Keppel’s asset-light business model, this facility will be owned by Keppel Sakra Cogen Pte. Ltd. (KSC), which will be held by Keppel Asia Infrastructure Fund LP (KAIF) and Keppel Energy with 70% and 30% equity interests, respectively.
Well, it can be confusing, but the asset has simply been moved from one Keppel subsidiary to another (mostly its funds) to make it more asset-light.
In terms of this plant’s long-term prospects. Singapore’s electricity demand is expected to rise as electrification and economic growth increase. Along with Singapore’s Green Plan, this Keppel power plant’s hydrogen capability would enable Singapore to shift to a more sustainable energy future. So, undoubtedly, this plant will be in high demand when it comes online, especially given Singapore’s emphasis on environmental goals.
From the standpoint of Keppel Corp, the plant’s ability to generate 600MW would allow Keppel to expand its power generation portfolio from 1300MW to 1900MW. This factory will also be in line with Keppel’s Vision 2030 for sustainability.
However, from a financial standpoint, this event is unlikely to have any effect on Keppel’s bottom line for at least the next four years. Even when it comes online in four years, looking at Sembcorp Industries, the margin won’t be particularly high, especially given the fact that there are currently a number of companies in the electric generation sector.
Concluding thoughts
Overall, both of these announcements demonstrate Keppel’s efforts toward its Vision 2030 goal of more stable revenues. Waste management and energy generation are unlikely to fluctuate significantly, providing Keppel Corp with this opportunity. Nonetheless, investors should not expect much from these announcements.
Why did Keppel want to buy a waste management firm and build a power plant?
Aside from the benefits listed above, perhaps another would be to use up its cash, especially given the current inflationary environment. Anyway, Keppel Corporation’s business is never exciting, but sometimes it’s the boring company that prevails in the long term.
