Analysts from CGS-CIMB Research and DBS Group Research are keeping their “add” and “buy” calls on Keppel Corporation BN4 after the conglomerate reported its results for the 3QFY2023 ended Sept 30 on Oct 19.
CGS-CIMB has kept its target price unchanged at $8.70 while DBS has lowered its target price to $8.05 from $8.70 to reflect the distribution of Keppel REIT units as well as the target price revisions of Keppel’s listed REITs.
CGS-CIMB analysts Lim Siew Khee and Kenneth Tan see Keppel’s infrastructure division leading the way with profit from the division for the 3QFY2023 up “significantly” for the 3QFY2023.
While no profits were disclosed in Keppel’s business update, the group said that its infrastructure division continued to record “strong earnings growth” for the 3QFY2023 and 9MFY2023 underpinned by its robust integrated power business.
“Keppel said 100% of its contracted power is locked in with fixed or indexed electricity price plans for the next two years. We estimate that 60% - 65% of its generating power portfolio is locked in, with the remainder subject to the merchant market,” write Lim and Tan.
On its monetisation plan, the analysts note that the group has already monetised some $865 million of its assets year-to-date (ytd). Though slower compared to the $1.5 billion worth of assets that were monetised in FY2022, the analysts believe this is due to the high interest rate environment and weak real estate market in China. The pace of asset monetisation is also likely to be accelerated with the monetisation of the rigs in Keppel’s asset co given the strong rig market.
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Further to their report dated Oct 19, the analysts note that Keppel’s 3QFY2023 revenue of $1.5 billion stood “broadly in line” with their expectations. The group’s 9MFY2023 revenue of $5.27 billion also formed 74% of the FY2023 estimates by Bloomberg consensus.
DBS analyst Ho Pei Hwa sees “promising earnings growth” ahead for the group, with core earnings expected to grow at a compound annual growth rate (CAGR) of 12% in the next two years.
The figure, which excludes Keppel’s sale of its offshore and marine (O&M) unit, will be driven largely by an expanding funds under management (FUM) base under asset management from $50 billion as at the end of FY2022 towards $80 billion, says Ho.
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In the medium term, Keppel aims to double its FUM to $100 billion by FY2026 and quadruple to $200 billion by FY2030. “We estimate [this] can add $4/share to our current target price,” says Ho. “In addition, property and land sales in China/Vietnam look set to recover following their reopening.”
Referring to the group’s 3QFY2023 results, Ho notes that Keppel’s earnings quality has improved “dramatically” with recurring income contribution to group profit jumping from 25% to 40% before its Vision 2030 to 60% since 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% is 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.
“We believe 40% of the upside [to our target price] will be driven by earnings growth of 12% CAGR while the remaining 60% will be on multiple re-rating from 1.1x towards 1.3x P/BV,” she adds.
PhillipCapital upgrades Keppel to ‘buy’
PhillipCapital analyst Peggy Mak has upgraded Keppel to “buy” from “accumulate” previously due to the recent price correction in Keppel’s shares.
Mak has, however, lowered her target price to $7.52 from $7.70 to account for the distribution-in-specie of Keppel REIT units. The distribution-in-specie for one Keppel REIT unit for every five Keppel shares has been approved by the latter’s shareholders. This is equivalent to 18 cents per Keppel share.
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In her report dated Oct 23, positives noted by Mak include the growth of Keppel’s infrastructure revenue and M1’s expanded customer base. Negatives highlighted by the analyst are the group’s real estate revenue, which fell in the 3QFY2023 due to the weak property sentiment and rising interest rates.
Keppel’s higher gearing – at 0.89x as at September, from 0.86x as at June – was also a concern.
Looking ahead, Mak, like her peers at CGS-CIMB, expects Keppel’s asset monetisation to pick up from the 4QFY2023.
“The rig assets held under Asset Co are enjoying strong charter rates, underpinned by higher crude prices. We estimate the divestments of these assets could return cash of about $2.50/Keppel share to Keppel Corp,” she writes.
As at 2.31pm, shares in Keppel are trading 3 cents higher or 0.47% up at $6.36.
