Analysts from CGS-CIMB Research, Citi Research and PhillipCapital are keeping their “add” and “buy” calls on Keppel Corporation after the group released its results for the FY2022 ended Dec 31, 2022, on Feb 2.
To Citi Research analyst Brandon Lee, Keppel Corporation’s FY2022 results provided a glimpse of what its business model could look like after the potential merger between Keppel Offshore & Marine (Keppel O&M) and Sembcorp Marine (SembMarine).
During its FY2022 results, Keppel Corporation reported a 9.4% y-o-y decline in its full-year earnings of $926.6 million. The decline was mainly due to the drop in Keppel Corp’s urban development and connectivity segments and mitigated by an increase in its energy & environment and asset management segments. Of the sum, 67% of the group’s patmi were from recurring income and over a third of its profits came from its Asset Management business.
“[This] makes it on track to take the next leap forward in its Vision 2030 trajectory to be a global asset manager/operator with target asset under management (AUM) of $200 billion versus $50 billion now,” Lee writes.
During the group’s FY2022 results, Lee notes that over $4.6 billion of assets were monetised, which makes Keppel Corp well on track to achieve its target of $5 billion by end-FY2023.
In his report dated Feb 2, Lee has kept his target price unchanged at $8.66, adding that he expects to see a positive share price impact for Keppel Corporation due to its better-than-expected dividend.
See also: Test debug host entity
Keppel Corp’s full-year dividend of 33 cents, while flat y-o-y, surpassed the consensus estimate of 29 cents and Lee’s estimate of 25 cents.
CGS-CIMB and PhillipCapital raise their target prices
Meanwhile, CGS-CIMB analysts Lim Siew Khee and Izabella Tan have raised their target price to $10.04 from $9.37 previously, which is the highest among the brokerages so far.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
Their target price is based on a sum-of-the-parts (SOTP) valuation to the calendar year (CY) 2024. It comprises $4 for Keppel’s urban development segment and applies a higher discount of 30% on landbank; accretion from its O&M divestment at $2.21; asset management at $2.62 and its connectivity and infrastructure at $1.19.
To them, Keppel Corp’s full-year net profit stood in line with their expectations at 101% of their forecasts. Keppel Corp’s full-year net profit stood at 102% of the forecasts by Bloomberg consensus.
“We see infrastructure and asset management as the key pillars in the near term; they contributed 65% to 2HFY2022 earnings while urban development slowly recovers,” write Lim and Tan.
Noting the write-back of $292.8 million for the rigs in Keppel Corp’s Asset Co on the back of improving rig market conditions, the analysts say they see further upside for more write-backs if favourable industry conditions remain.
“In addition, the monetisation and recoverability of these legacy rigs/vendor notes could be accelerated. With the above, the carrying value of the Asset Co is now at $4.36 billion,” they say.
On the completion of the merger between Keppel O&M and SembMarine, CGS’s Lim and Tan say investors could focus on the return on equity (ROE) improvement from the current 8% to 15% as well as the sustainability of the dividend payout from Keppel.
“We expect no change in its medium-term strategy as Keppel Corp executes its asset-light strategy in previously guided areas of focus: energy & environment, urban solutions and connectivity. Management aims to keep dividend payout at 50%-60%, depending on the pace of asset monetisation,” explain Lim and Tan.
For more stories about where money flows, click here for Capital Section
PhillipCapital’s analyst Terence Chua has also increased his target price to $9.54 from $8.95 previously even though the group’s net profit for the FY2022 stood below his expectations at 92% of his full-year estimates.
“[Keppel’s] net profit of $926.6 million was under our expectations as urban development continued to underperform due to headwinds from China’s property market,” notes Chua.
That said, his higher target price factored in an increase in his estimates for Keppel O&M and Asset Co following the partial reversal of impairments made and the clearer path to divestment.
“For its energy & environment business, we valued its O&M division at 0.8x book value but crank up the realisable value of its rigs. Keppel Infrastructure Holdings is valued at 10x FY2023 earnings. For its urban development segment, we lowered the discount on Keppel Land’s revised net asset value (RNAV) to 35% (previously 40%) on better clarity on the monetisation plans for its urban development portfolio and 1.5x price to book value of the Sino-Singapore Tianjin Eco-City,” says Chua.
“In the connectivity segment, we valued M1 at 9x FY2023 earnings. For the asset management division, we valued Keppel Capital at 10x FY2023 earnings, a slight discount to its peers,” he adds.
His new target price translates to about 1.2x of Keppel Corp’s FY2023 book value, which is a slight premium to the group’s historical average as its transformation plans gain traction.
Group set to exceed asset monetisation target by 2023: PhillipCapital
On Keppel’s asset monetisation goals, Chua believes that the group is set to exceed its target of $5 billion by 2023.
“Moving ahead, we believe Keppel will move to monetise another [around] $10 billion of assets it previously identified for monetisation. It had previously listed $17.5 billion of assets it is seeking to monetise as part of its strategy to transform its group to be more asset-light,” he says.
On the divestment of Keppel O&M, the analyst adds that its completion will further enable the group to transition towards an asset-light structure.
“More importantly, the new enlarged SembMarine entity, which Keppel will hold 5% of, will be better equipped to compete against global well-resourced players from South Korea and China,” he says.
“Upon the completion of the proposed transaction, Keppel will distribute 19.1 SembMarine shares to its shareholders for every Keppel share they hold. Based on SembMarine’s closing price of 14 cents [as at Feb 6], the implied value of its distribution in specie would be even higher at $2.67 per Keppel share. This means that the theoretical ex-dividend in specie price of Keppel would be $4.51,” he adds.
Looking ahead, Chua also remains positive on Keppel Corp’s urban development business this year on the back of improving market sentiments following the relaxing of Covid-19 restrictions.
“As Keppel accelerates its transformation into an integrated asset-light business, we believe there is room for a further reduction in the Holdco discount we apply to the group over time. We will review the discount we apply to the group as the group continues its transformation,” he says.
Shares in Keppel Corp closed 3 cents lower or 0.42% down at $7.08 on Feb 8.
