Analysts are mixed on Keppel Corporation BN4 after the group reported a “significantly higher” net profit y-o-y for the 1QFY2023 ended March 31. The group’s revenue for the quarter increased 9% y-o-y to $2.26 billion, with its energy & environment, urban development and connectivity segments reporting higher contributions.
PhillipCapital’s Peggy Mak downgraded her call to “accumulate” from “buy” previously, noting that the group’s revenue for the quarter only rose by 3% y-o-y without the offshore and marine division, which was divested in end-February.
The analyst has also lowered her target price to $7.01, down from $7.21 (after the distribution of Sembcorp Marine or SembMarine’s shares).
Despite the downgrade, Mak still notes several positives including the growth from Keppel’s urban development segment. Within the segment, Mak believes that Keppel Land remains the segment’s key earnings driver. During the quarter, Keppel Land recorded 72% higher home sales to $740 million underpinned by a strong showing in China and India.
“It has increased focus on trading projects, which have faster turnaround and require lower working capital. About $280 million was raised from the disposal of three assets in the Philippines, Myanmar and Vietnam,” says Mak.
The analyst also noted Keppel’s higher sales of power, renewables and energy-related services under a subscription model. Keppel’s energy and environment posted a 3% y-o-y growth revenue to $1.03 billion on the back of the higher sales from power and renewable energy as well as its energy-as-a-service (EaaS) offering, which gained traction with over $320 million subscriptions secured.
The disposal of Keppel Offshore & Marine (Keppel O&M), which resulted in a gain of $3.3 billion, was also a positive. Keppel has since distributed $3.85 billion worth of SembMarine’s shares to its shareholders at end-February. About 5% of SembMarine’s shares are still held in escrow, which is equivalent to 23.7 cents per Keppel share.
That said, a negative from Keppel’s results was its higher net gearing of 0.83x as at end-March from 0.78x as at end-2022, though Mak attributes it to Keppel’s lower equity in total after the distribution-in-specie.
In her report, Mak notes that Keppel’s asset monetisation strategy is what drives its valuation.
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“[Keppel] has divested [its] out-of-scope assets to Asset Co, in return for $4.25 billion in vendor notes, $120 million in perpetual securities and a 10% equity stake in Asset Co. In total, these are worth $2.50/Keppel share,” she writes.
“The vendor notes pay a coupon of 4% to Keppel, and perpetual securities, 10%. Asset Co could derive cash flow from chartering or sale of the completed rigs; less capex required to complete the remaining rigs, to fund the interest cost and redemption,” she adds.
Keppel says it intends to announce the next phase of its transformation plans in May. The group adds that it will also outline a new interim monetisation target to reach its goal of $17.5 billion and that it is gearing towards a recurring income model on an asset-light structure.
To Mak, potential catalysts include the earlier divestment of assets at Asset Co, which will lead to the earlier redemption of the vendor notes and perpetual securities. An early release of SembMarine’s share sale proceeds from escrow is also another upside catalyst with both events generating cash flow to lower the group’s gearing.
CGS-CIMB Research analysts Lim Siew Khee and Izabella Tan have also lowered their target price on Keppel to $8.70 from $10.04 previously. Their new target price has been adjusted for the divestment of Keppel O&M.
That said, Lim and Tan remain positive on Keppel’s prospects as the group seeks to displace volatility with recurring income. In their report dated April 21, the analysts have kept their “add” call as they see Keppel’s recurring income possibly remaining steady at 60% for FY2023 with the interest income from their vendor notes from the sale of their legacy rigs to Asset Co.
“Recall that Keppel generated $560 million of recurring income or 60% of its FY2022 net profit, driven mainly by infrastructure. We had previously expected recurring income from this segment to dip slightly in FY2023 as Keppel divested 10% in renewable associate (MET) and lower power prices in Europe due to overall increase in solar and wind energy production as well as falling gas prices,” note the analysts.
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On Keppel’s 1QFY2023 business update, Lim and Tan said that there were “no major surprises” with all segments’ profits were said to be higher y-o-y, except for Keppel Capital due to absence of fees from acquisitions made by Keppel Infrastructure Trust (KIT) in 1QFY2022.
On Keppel’s plans to monetise $17.5 billion worth of assets by 2030, the analysts believe that the timeline is likely to be brought forward, noting that Keppel has already successfully monetised some $4.9 billion worth of assets since October 2020 and is on track to exceed its $5 billion target by FY2023.
To this end, they see that the communications on Keppel’s fee-bearing assets under management (AUM) and the deployment of its existing $50 billion AUM, a clear capital recycling plan per annum, a target for recurring income growth, dividend payout outlook and new return on equity (ROE) target could be key.
Further to their report, the analysts have raised their earnings per share (EPS) estimates for FY2023, FY2024 and FY2025 by 8.6%, 12.8% and 11.1% respectively to account for higher net interest income.
That said, a dampened global economy outlook is a key risk to Lim and Tan’s outlook for Keppel as it may weaken its asset monetisation and capital recycling plans.
Citi Research’s Brandon Lee is keeping his “buy” call with a higher target price of $7.51 from $5.64 as he believes Keppel is “strongly committed to” and is “executing” its strategy to pivot away from its lumpy property development business well.
“[This is] evidenced by [an estimated] 30% fall in unsold residential landbank from FY2020 to [around] 39,000 units in 1QFY2023 (also helped by sales of [around] 2,200 units/year) and 56% of $4.9 billion in asset monetisation from property-related entities since October 2020 (start of monetisation program),” Lee writes.
“We expect this pivot to continue gaining momentum as it transforms into a global (asset-light) asset manager, which should narrow net asset value (NAV) discount of its Urban Development ([which is] 52% of our sum-of-the-parts or SOTP) business, hence we have reduced revised net asset value (RNAV) discount of Urban Development to 20% (from 35% previously). 40% of its $17.5 billion in monetisable assets are landbank-related,” he adds.
In his report dated April 24, Lee sees the discount to Keppel’s NAV discount after pivoting to its asset-light business, comparing the group to its closest SGX-listed asset manager peer, CapitaLand Investment (CLI). Following its own restructuring, CLI, received a P/B uplift of around 15% from its average of 1.0x to 1.2x and is currently trading at a P/B of 1.3x.
“We believe Keppel would need to entirely divest or further lighten its property development biz to trade closer to CLI and hence have pegged a 20% discount to its SOP, though revised target price of $7.51 implies [a] 1.2x P/B, vs. current 1.0x,” Lee writes.
Lee’s valuation has also priced in Asset Co’s valuation in his FY2023 – FY2025 forecasts by including the 4% interest accrued on the $3.9 billion of vendor notes issued to Keppel.
“Considering that management has guided for the legacy rigs to be monetised over next three to five yrs, we see upside risks from: share of potential gain on sale of the rigs (or alternatively, revaluation of their BV given Keppel’s 10% equity stake in Asset Co (currently valued at $499,000); and early redemption of the notes (at 5% premium),” he says.
Finally, Lee has reduced his core patmi estimates for Keppel’s FY2023 earnings by 8.5% but has upped his estimates for FY2024 by 20.9% to factor in Keppel O&M’s removal and revised residential sales schedule, mitigated by a 144% and 152% increase in Keppel’s energy & environment contribution for the FY2023 and FY2024 respectively.
As at 1.52pm, shares in Keppel are trading flat at $6.53.
