SINGAPORE (July 7): Keppel Corp could be building up a base of FLNG (Floating Liquefied Natural Gas) assets to help generate recurring income, says UOB KayHian, but it may take years to achieve.
In a Friday report, lead analyst Foo Zhi Wei says Keppel could create an FLNG trust by selectively taking stakes in the FLNG orders it undertakes.
Given the rising role of gas, Foo says this strategy provides Keppel with a highly scalable model to reap the benefits of higher FLNG vessel demand in the future.
According to Foo, the economics of FLNG conversion projects yield a payback period of as low as 5-7 years.
“Using the Hilli Episeyo project as an example, we estimate an equity IRR of 14% (assuming three-year construction time) and EBITDA yield of 14%,” says Foo.
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The actual numbers could look even more compelling as the returns are based only on its initial eight-year contract while running at half its processing capacity, adds Foo.
Assuming Hilli Episeyo runs at full capacity, the equity IRR rises to an astounding +40% over its eight-year contract even though the vessel has an economic lifespan of 20 years.
The high yield and short payback period makes FLNGs highly suitable for packaging into a yield instrument, says Foo.
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Keppel’s co-partner and client, Golar LNG, has already done this through the incorporation of Golar LNG Partners (GMLP).
Packaged as a Master Limited Partnership which is similar to Singapore’s business trust, GMLP currently provides a dividend yield of 11.2%.
UOB has a “hold” on the stock and recommends investors enter at $5.90 and exit at $6.55.
Shares in Keppel are trading 7 cents lower at $6.33.
