Analysts from CGS-CIMB Research, DBS Group Research and UOB Kay Hian are all keeping their respective “add”, “buy” and “buy” calls on Keppel Corporation BN4 following the group’s results for the 1HFY2023 ended June 30. The analysts have also kept their target prices unchanged at $8.70, $8.30 and $9.09 for CGS-CIMB, DBS and UOB Kay Hian respectively.
On July 27, Keppel reported record-high earnings of $3.6 billion as it booked gains of $3.3 billion from the disposal of its offshore & marine (O&M) unit during the 1HFY2023.
Excluding the discontinued O&M operations, Keppel’s net profit stood at $445 million, which stood in line with the analysts’ expectations from all three brokerages.
For CGS-CIMB’s Lim Siew Khee and Kenneth Tan, Keppel’s net profit of $445 million stood at 45% of their FY2023 estimates. “We give credit to the infrastructure segment as net profit rose 109% y-o-y to $291 million, lifted by strong integrated power and recurring income,” they write in their July 28 report.
“Profit contribution from [Keppel’s] energy as a service (EaaS) was not disclosed but the contracts momentum has been strong with year-to-date (ytd) wins of $1.2 billion in Singapore, Vietnam, and Thailand,” they add.
The analysts believe Keppel’s earnings could be stronger in the 2HFY2023 thanks to more deals and earnings for its EaaS segment, in particular, to be “more material” from FY2024 onwards.
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That said, the key highlight to Lim and Tan was Keppel’s special dividend-in-specie (DIS) of 1 Keppel REIT K71U unit for every five Keppel shares. The DIS, in addition to the group’s interim cash dividend of 15 cents, was made to celebrate its 55th anniversary.
The proposed distribution is pending approval from Keppel’s shareholders at an extraordinary general meeting (EGM) to be held. Should the proposed distribution go through, Keppel’s stake in the REIT will be reduced to around 37.1%.
“We were positively surprised by the 55th anniversary DIS of 18.4 cent Keppel REIT shares per Keppel share. Including [its] interim distribution per share of 15 cents, [Keppel’s] 1HFY2023 yield [is] at 4.8%,” write the CGS-CIMB analysts.
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They add: “We think Keppel is advancing to become a global alternative real asset manager, [although] downside risks [are a] weak macro [environment] that weakens fund performance and slows the pace of capital recycling.”
DBS’s Ho Pei Hwa has also viewed the special DIS of Keppel REIT units as a positive factor, in addition to its “promising earnings growth” ahead.
The analyst has projected Keppel’s core earnings, excluding the sale of its O&M unit, to grow at a compound annual growth rate (CAGR) of 12% in the next two years.
“[This is likely to be] driven largely by an expanding funds under management (FUM) base under asset management from $50 billion as of end-FY2022 towards $80 billion,” Ho writes.
“In the medium term, Keppel aims to double its FUM to $100 billion by FY2026 and quadruple to $200 billion by FY2030, which we estimate can add $4/share to our current target price,” she adds. “In addition, property and land sales in China/Vietnam look set to recover following their reopening.”
Referring to Keppel’s 1HFY2023 net profit, which stood in line with her estimates, Ho notes that the group’s earnings quality has “improved dramatically”. For the six-month period, the group’s contribution from its recurring income business to its overall profit jumped from 25% to 40% prior to Vision 2030 to around 60% in FY2022.
“The trend should continue with concerted effort made to pivot away from orderbook-based revenue to income from fees and from its portfolio assets (real estate, infrastructure, and digital assets). While its return on equity (ROE) at [around[ 9% remains far behind its target of 15%, we look forward to FUM growth and turnaround of property business to drive returns towards this target in the medium term,” Ho writes in her July 28 report.
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Like CGS-CIMB’s Lim and Tan, Ho looks forward to a “better” 2HFY2023 from Keppel with a “potential conclusion of asset management deals and divestments”.
Ho is also very buoyant about the group’s prospects, noting that it offers investors a “unique and unrivalled proposition as a global asset manager with developer and operator capabilities in real estate and green industrial space (energy & environment and infrastructure).”
“We believe that Keppel’s strong engineering/construction roots and track record in capital management positions it well to grow as a global asset manager,” she says.
However, she warns that a slower-than-expected FUM growth, revaluation loss and the impairment of non-core assets could pose downside risks to her forecasts.
Finally, UOB Kay Hian’s Adrian Loh also liked Keppel’s “solid set” of results for the 1HFY2023, which came within his expectations.
“The two key highlights were the continued strength in its infrastructure business which saw a doubling of its segmental net profit, as well as the DIS of Keppel REIT,” says Loh in his July 28 report.
“The company guided for increased transaction newsflow in 2HFY2023 for its asset monetisation programme which could be a key share price driver,” he adds.
Like his peers, Loh is upbeat about Keppel’s goal to become a group that is more asset-light with a solid recurring earnings stream.
“[The group], post the Keppel O&M divestment… should eventually achieve its 15% ROE target versus 8.3% in 1HFY2023,” he says.
“In the near term, we believe that the market will focus on Keppel’s asset monetisation announcements as this could bolster earnings in 2HFY2023 and into FY2024,” he adds.
Shares in Keppel Corp closed 12 cents lower or 1.62% down at $7.27 on Aug 2.
