Keppel and Sembcorp’s share price has been on a tear since the disposal of their marine business.
Keppel has went up 35% from the bottom this year but is still down 3.5% YTD while Sembcorp is up 65% YTD with a strong consistent performance throughout.
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In the communications to their investors, both Keppel and Sembcorp have announced plans for the future to grow their business and deliver value to shareholders.
Here we look at what Keppel and Sembcorp are doing now, their plans for the future and try and figure out which stock is better.
What does Keppel do now?
Keppel has four main business segments in energy & environment, urban development, connectivity and asset management.
- The energy & environment segment is focused on business areas relating to the safe and efficient harvesting of energy sources. It also serves the offshore & marine industry with an array of vessel solutions and services, renewables, and providing cities with power, as well as solutions for waste and water & wastewater treatment.
- Urban Development includes property development and investment, as well as master development.
- Connectivity includes the provision of telecommunications services, retail sales of telecommunications equipment and accessories, development and operation of data centres and provision of logistics solutions.
- Asset Management include management of private funds and listed real estate investment and business trusts.
In recent times, Keppel has been simplifying its business by divesting non-core assets such as Keppel offshore & marine and Keppel Logistics.
With the divestments, it also reduces the overall leverage position for the company and will allow them to make the right investments for the future.
Keppel’s plan for the future
This is not Keppel’s first plan but hopefully it would be the one that bear results. Keppel plans to create value of shareholders by being a global asset manager and operator. This is effectively an asset light strategy as it plans to achieve its plans by increasing its AUM from $50 billion to $200 billion by 2030. This is a remarkable ambition that would definitely provide substantial amounts of recurring income as well as return on investment if achieved.
To meet this goal, Keppel will expand its business in renewables, clean energy and environmental solutions, and bolster Energy-as-a-Service(EaaS) offerings. EaaS covers services such as energy supply, cooling services, energy optimisation and analytics as well as electric vehicle charging. It is also exploring green ammonia and green hydrogen solutions to support low-carbon economy.
What does Sembcorp do now?
- The Renewables segment provides electricity from solar and wind resources (both self-generated and imported), energy storage, trading of Energy Attribute Certificates as well as provision of system services that support integration of renewables into the grid. This segment also includes the development and provision of installation, operation, and maintenance of solar, wind and energy storage assets.
- The Integrated Urban Solutions segment supports sustainable development through its suite of urban, water as well as waste and waste-to-resource solutions. The segment’s businesses comprise the development of largescale integrated urban developments and integrated townships such as industrial parks, business, commercial and residential spaces, production and reclamation of water and industrial wastewater treatment as well as solid waste management and waste-to-resource solutions. This segment also includes decarbonisation solutions like carbon capture, utilisation and storage (CCUS) projects.
- The Conventional Energy segment manages the sale of energy molecules (including natural gas, steam, and electricity from a diversity of fossil fuels such as natural gas and coal). This segment also includes sale of water products from its integrated assets.
Recently, Sembcorp sold its entire stake in Sembcorp Energy India Limited (SEIL). SEIL is one of the largest independent power producers in India, operating two supercritical coal-fired plants totalling 2.6GW. This sale accelerated the transformation of Sembcorp’s portfolio from brown to green.
Sembcorp’s plan for the future
Sembcorp has also set goals to grow its renewable energy portfolio.
Similarly, Sembcorp is also looking to unlock value in its assets and move towards an asset light mode. To this end, Sembcorp is looking to spinoff/dispose of its waste management division as part of its ongoing strategic initiatives to maximise shareholder value, it has also commenced a process to explore the potential divestment of its energy from waste plant.
Although the waste management division is stable and provides strong recurring revenue as SembWaste is one of three public waste collectors in Singapore, the growth upside seems to be limited.
At the same time, it is also growing organically. Sembcorp will import natural gas piped from the West Natuna gas fields in Indonesia at an estimated value of S$1.9 billion. It is expected to be effective by 2H2023. Sembcorp has also recently won a contract to build own and operate a solar plant in Oman with a 20 year power purchase agreement(PPA).
Sembcorp also recently entered into PPAs locally with Micron and Singtel for 18 years and 10 years respectively. Having PPAs in place improves financial security with long term price and budget certainty, mitigating the risk from extreme market volatility. With a significant price benefit compared with the wholesale market, it also generates long-term savings for the business. Sembcorp will have to strike a balance and leave some capacity in the spot market which could provide upside should prices rise.
Keppel vs Sembcorp – who is better?
Both Keppel and Sembcorp seems to be following the same playbook but yet avoiding direct competition with each other where possible.
Sembcorp’s prospects looks much more attractive now because it has reduced its brown portfolio, scaled up its green renewables portfolio and also grown its existing business organically which is why the share price has risen much more.
Keppel is also moving from being a conglomerate to an asset manager but it seems like their transformation has been underappreciated by the market. This could be because of an ROE drag as analysts expect segments of Keppel such as their Chinese property development segment to underperform. The value of recent contract wins by Keppel seem to also be smaller than Sembcorp’s deals.
There is a perception that Sembcorp seems to be ahead currently, but we somehow think that Keppel will not let themselves fall behind. Both companies have similar mindset and objectives and are scaling up to capture growth in their spaces. Hence, we think maybe this time it is best to have your eggs in both baskets.
One divergence which I notice is the transaction for the waste collection sector for both companies. Kepcorp bought 800 Super last year for $300m whereas Sembcorp is currently contemplating to divest SembWaste to Private Funds for about $200m. The other factor I noticed about Sembcorp is the disposal of their Coal fired plant in India. Although the selling price fetched a premium but payment is only completed in a few decades later. It marvels me that whenever an announcement is made esp from Sembcorp the price will bounce to new high
The proceeds from their SEIL disposal comes in annually not in 25 years time. They explained how his deferred payment note mechanism worked in their announcement. The main reason for such a transaction structure really is financing really. No banks are keen to lend for acquisition of a coal plant these days.