Keppel Corp’s new strategy to capture more recurring income is showing up in its results which was announced on July 27. In 1HFY2023 ended June, recurring income increased 62% y-o-y to $340 million, making up three-quarters of total earnings.
The growth was driven by higher operating income from Keppel’s infrastructure division, which is going big on renewables, clean energy and decarbonisation solutions. As recent as 1HFY2022, the proportion of recurring income was just under half.
As a whole, Keppel reported record earnings of $3.6 billion for 1HFY2023 versus $498 million recorded a year earlier as the company booked a gain of $3.3 billion from the sale of its offshore and marine unit. Excluding one-offs, earnings would have increased 3% y-o-y to $445 million. Revenue in the same period rose 11% y-o-y to $3.72 billion, with higher contributions from its infrastructure and connectivity segments.
Keppel plans to pay an interim cash dividend of 15 cents, which is the same sum paid out in 1HFY2022. Keppel is also planning to give a distribution-in-specie of one Keppel REIT share, worth 91.5 cents each based on its July 26 price, for five Keppel Corp shares held. The distribution will be put forward to shareholders for their approval at an EGM to be called.
Assuming completion of the distribution, Keppel will remain the largest unitholder of Keppel REIT with an interest of about 37.1%. Keppel says it “remains committed” to driving the REIT’s growth, which is in alignment with the interests of other unitholders. Keppel adds that the distribution will further increase the REIT’s public float, increase its liquidity and widen its base of investors.
Three months ago, Keppel announced a “bold and ambitious” strategy update to become an asset manager, ditching its old conglomerate model of operating its business. By doing so, it expects to earn a bigger proportion of recurring income and be less reliant on earnings tied to development projects.
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To do so, Keppel is removing its conglomerate structure and reorganising itself into a horizontally integrated model in three platforms. These are a fund management platform, an investment platform and an operating platform. If Keppel has its way, financial analysts will no longer value the company via a sum-of-the-parts model where a conglomerate discount is always imputed, the company had said then.
As at end-June, Keppel’s AUM reached $65.6 billion, which included about $12.4 billion of real assets on its balance sheet that can be potentially converted into fee-bearing funds under management (FUM) over time. FUM stood at about $53.2 billion, which Keppel aims to grow to $100 billion by 2026 and $200 billion by 2030.
According to Loh, the company has been “prudently” holding back on new investments thus far because of a more volatile market. However, he expects “more interesting” investing opportunities to show up in 2HFY2023 as the market adjusts to the new pricing paradigm, which will better reflect tighter credit markets, higher interest rates and a more subdued economic growth outlook.
“The anticipated increase in investment activity in the second half will in turn contribute to higher asset management fee income,” says Loh, adding that Keppel’s private funds, REITs and business trust are currently pursuing over $13 billion of deals across the spectrum of infrastructure, real estate and connectivity assets. “We will continue to invest to achieve the best risk-adjusted returns for our funds and investors,” he adds.
At the briefing, Loh explains that Keppel’s management team is functioning like air traffic controllers. “It is a bit like planes taking off. Over time, we see if there are some slowdowns in a particular flight, we see if we can move any of these projects we’ve targeted for monetisation in later quarters,” he says.
Year to date, Keppel has divested some $420 million worth of assets, bringing the total to $4.8 billion since October 2020, when Loh kicked off the asset recycling strategy. “We expect the pace of asset monetisation to increase over time as market sentiments improve and will push ahead with our target to monetise $10 billion to $12 billion of assets by 2026 and $17.5 billion eventually,” says Loh.
Keppel shares closed 0.43% lower at $6.96 at July 2
