Excerpts from UOBKayHian report
Keppel Ltd (SGX: BN4)
Data Centres’s were a key focus of Keppel Ltd 3Q business update and rightly so, given that unlike its other DC-related competitors in the market, it can extract multiple fee-generation opportunities from this segment due to its position as an asset manager and operator.
We also highlight its Bifrost fibre asset which starts operations in 2025 and will be a long-term revenue generator for Keppel.
Maintain BUY with a higher target price of S$9.25.
A multi-faceted exposure to the data centre theme
Last week, Keppel (KEP) 3Q24 business update shined a spotlight on the company’s data centre (DC) business which we believe has been underappreciated by the market, given its varied businesses and the geographies it is exposed to.
The key attraction of DCs for KEP is its ability to extract multiple revenue streams from this asset class as both an owner and operator via
development fees, asset management fees as well as gains from disposal of the asset.
In addition, KEP can leverage its operating track record and client relationships to enter new markets as shown by its new DC assets in Japan and Taiwan that were announced recently.
Growing its DC exposure
Excluding Keppel DC REIT, KEP itself has 10 DC assets valued at S$1.8b held within the company and its private funds. Including KDCREIT, the company has 35 DCs across Asia Pacific and Europe with 650MW of gross power capacity.
Of this, 70% is operational and the rest is being developed. In the near term, KEP has flagged that it will look to grow this capacity by another 500MW to nearly 1.2GW.
The company anticipates that this will be fuelled by funds from its upcoming Data Centre Fund III as well as other co-investments.
Float that data centre
KEP will be pioneering a floating data centre park (FDCP) in 2025. The asset will be modular in nature, allowing for quick scalability depending on customer demand.
More importantly, this will increase cooling efficiency by up to 80% as it will use seawater (not potable or industrial water) given its near-shore location.
Undoubtedly, this type of location will help free up valuable land for other urban uses in a land-scarce city like Singapore.
New power generation options
KEP has announced a number of JVs and collaborations with companies such as Toll Group, Royal Vopak and Mitsubishi Heavy Industries to explore LNG and/or hydrogen power for the FDCP.
Traditional DCs have had issues regarding the usage of expensive land, cooling and energy usage whereas KEP’s forward strategic planning for powering its FDCP appears to ameliorate a number of these issues.
Bifrost – a new revenue stream in 2025
In addition to highlighting its DC exposure during its 3Q business update, KEP also touched upon its Bifrost asset which is a 10.4Tbps 20,000km trans-Pacific cable system connecting Singapore to the west coast of the US.
The asset is expected to start operations in 1H25 and more importantly, unlike other trans-Pacific cables, Bifrost takes a southern route (see map overleaf) via Indonesia and the Philippines, thus avoiding the more politically sensitive northern route via Hong Kong/China.
The Bifrost consortium comprises Meta, PT Telekom and Amazon with KEP being a shareholder as well as the operations and maintenance provider.
Management stated that it continues to witness strong demand for its fibre pairs, although it did not disclose how many pairs it owns, but that it has sold two pairs. Since its first sale in 2021, management commented that prices have “more than doubled”
Valuation/Recommendation
We maintain our BUY rating on KEP. We have raised our SOTP-based target price by 4% to S$9.25/share (previously S$8.86/share) as we increase our P/B target multiple for the company’s connectivity segment from 1.5x to 2.0x.
We believe that this S$0.36/share increase adequately reflects the medium-term valuation upside from KEP’s DC and Bifrost assets that we have outlined above.
In the near to medium term, earnings from its infrastructure segment will be underpinned by the fact that more than 70% of its contracted generation capacity in Singapore is locked in for three years or more.
KEP currently trades at 2024F PE of 13.2x and P/B of 1.1x which we view as far from being egregious, especially considering the company’s more stable earnings stream given the divestment of its offshore marine business and instead replaced with asset management fees as well as operation and maintenance fees from Bifrost for example.
You can find the full report here and the company website here.
