Analysts are all positive on Keppel Limited after the group reported earnings of $4.11 billion for the FY2023 ended Dec 31, 2023, 340.1% higher y-o-y. The record set of earnings were attributed mainly to divestment gains of $3.3 billion from the group’s offshore & marine (O&M business).
Net profit from continuing operations rose by 19% y-o-y to $996 million for the full year, as all three of Keppel’s segments, infrastructure, real estate and connectivity, were profitable.
Keppel’s earnings for the 2HFY2023 rose by 7.2% y-o-y to $460.6 million. Net profit from continuing operations grew by 36% y-o-y to $551 million.
Despite the earnings surge, PhillipCapital analyst Peggy Mak downgraded her call to “accumulate” from “buy” due to the recent share price gains.
However, Keppel’s core net profit, which was up by 5.6% y-o-y, stood in line with her expectations.
“Recurring income grew 54% to $773 million, or 88% of net profit. Infrastructure made up 90% of this,” writes Mak in her Feb 5 report.
See also: OCBC, citing potential recovery, initiates coverage on Nanofilm with tentative 'hold' call
“Growth was underpinned by a higher margin from energy sales, offset by the doubling of interest expense to $328 million, and $111 million loss on distribution of Keppel Reit K71U units to Keppel shareholders,” she adds.
In her report, Mak elaborates that Keppel’s integrated power business, which saw doubled operating income and margins, benefitted from the improved energy spark spread and exit from low-margined legacy contracts.
M1, which saw revenue growth of 6% after the acquisition of a Malaysian infocomm technology (ICT) in late 2022, was another positive. The business’ key drivers were higher enterprise customer sales, a higher number of customers and the recovery of its roaming services that stood at 80% of its pre-Covid-19 levels.
See also: Macquarie revises Singapore earnings growth for FY2024 to 7% from 3%
Meanwhile, the real estate division was impacted by higher interest expenses and lower fair value gains on investment properties and higher overheads at asset management units.
Keppel’s recurring fee income from its fund management business fell amid muted appetites from investors on the back of rising interest rates and tighter credit conditions.
“But the pace could pick up in FY2024, as recently-acquired Aermont Capital extends its investor reach, and the interest rate environment turns favourable,” says Mak.
Net gearing also rose to 0.9 times, reaching the management’s internal net gearing threshold of 1 time, another negative in Mak’s view.
Looking ahead, Keppel’s energy sales are expected to buttress the group’s net profit thereby providing it with a stable and visible stream of earnings and cash flow till 2026. This is when the new 600MW Keppel Sakra Cogen plant becomes operational.
Earnings growth could also be derived from higher recurring income from the fund management platform.
That said, the near-term catalyst would be the monetisation of its assets.
For more stories about where money flows, click here for Capital Section
“Keppel is sticking to its target to monetise a further $5 billion - $7 billion of assets by 2026, after a slow FY2023 ($0.9 billion). It has $12.6 billion worth of assets on its balance sheet that can be disposed of or converted into future funds under management. These include vendor notes issued by Asset Co which holds the legacy rigs,” says Mak.
Despite the downgrade, Mak has raised her net profit projections in FY2024 by 0.4% to $946 million. She has also increased her target price to $7.98 from $7.52 as Keppel’s recurring income contributes to a bigger share of its net profit.
CGS-CIMB Research analysts Lim Siew Khee and Kenneth Tan have kept their “add” call on Keppel with a higher target price of $8.98 from $8.70.
“We believe the acquisition of Aermont Capital likely raised Keppel’s standing in the global asset management space, paving the way for more earnings-accretive platform deals as Keppel works towards its $200 billion funds under management (FUM) target by FY2023,” write Lim and Tan.
In the FY2023, the analysts were “encouraged” by Keppel’s strong recurring income growth of 54% to $773 million, contributing about 88% to the group’s overall net profit.
“Based on 15 times FY2024 P/E, we can value Keppel’s recurring income at $12 billion, suggesting that its current share price may not have priced in its real estate and connectivity business,” they write in their Feb 1 report.
In FY2024 to FY2025, profits from Keppel’s infrastructure business are likely remain firm from its FY2023 performance as spreads are locked in. However, as more long-term contracts start to stream in, the blend of spread could be slightly diluted, say the analysts.
“We factored in steady operating income for FY2024 – FY2025 and a 4% decline in FY2026 as the one- to three- year contracts (31% of capacity) start to taper off. We also assume the potential premium green electron from its hydrogen-ready 600MW power plant (to be commissioned by 1HFY2026) to contribute meaningfully in FY2027,” they add.
DBS Group Research analyst Ho Pei Hwa has also kept her “buy” call with a higher target price of $9 from $8.05 previously as Keppel’s FY2023 earnings stood ahead of her expectations.
“We came away from Keppel’s briefing with increased confidence in its outlook and transformation journey. The outstanding infrastructure earnings seem sustainable, indicating a potential earnings upgrade for FY2024. Asset management fee income set to grow with higher FUM and more conducive operating environment,” she writes in her Feb 2 report.
For the next two years, Ho projects Keppel’s core earnings – excluding its O&M sale – to grow at a compound annual growth rate (CAGR) of 10%, driven mainly by an expanding FUM base under asset management. Keppel’s FUM base stood at $50 billion as at the end of 2023 and is expected to grow towards $80 billion, says Ho.
“In the medium term, Keppel aims to double its FUM to $100 billion by FY2026 and quadruple to $200 billion by FY2030. In addition, property and land sales in China/Vietnam look set to recover following their reopening,” she adds.
Ho also likes the group’s improved earnings quality with recurring income contributing about 60% to 80% to its overall earnings since 2022, jumping from 25% to 40% before Keppel announced its Vision 2030 strategy.
“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),” she writes.
“While its return on equity (ROE) at [around] 10% is far behind its target of 15%, we look forward to FUM growth and recovery/divestment of properties to drive returns towards this target in the medium term,” she adds.
Overall, Ho has raised her earnings projections for FY2024 and FY2025 by 9 to 14% to $1.04 billion and $1.2 billion as she expects to see higher profits from Keppel’s infrastructure business.
Her target price is derived based on 18 times Keppel’s FY2024 P/E on asset management earnings. It also factors in a 25% discount to its property’s revalued net asset value (NAV) plus discounted cash flow (DCF) for its Tianjin Eco-city land sales, 6 times P/E on Infrastructure and 8 times P/E on earnings from its connectivity arm.
Her new target price implies 16 times Keppel’s FY2024 P/E and 1.5 times its P/BV.
“We believe 40% of the upside will be driven by earnings CAGR of 10% while the remaining 60% will be on multiple re-rating from 13 times towards 16 times P/E,” she says.
UOB Kay Hian analyst Adrian Loh has kept his “buy” call on Keppel as the group’s results came in better than expected due to strong operating performance from its infrastructure and connectivity segments.
In his report dated Feb 2, Loh called Keppel’s latest performance a “strong set of results with more to come” due to its strong operational infrastructure performance, “meaningful” increase in net profit under the connectivity segment, solid growth in recurring income and rise in ROE.
That said, he is a little concerned on Keppel’s “slightly stretched but manageable” balance sheet due to its net gearing of 0.9 times.
“However, management appeared to be sanguine about this and believes its changing earnings profile over the next few years should lower its gearing levels,” he writes.
On the back of Keppel’s outperformance, Loh has upgraded his FY2024 and FY2025 net profit estimates by 1.4% and 3.8% to $996 million and $1.05 billion respectively on slight earnings and revenue growth from the infrastructure and connectivity segments, offset by lower y-o-y earnings from real estate.
The analyst has, however, lowered his target price to $8.89 from $9.09 from a mildly higher share count and slightly lower valuation from Keppel’s property segment.
“The asset-light, fee-related earnings acquisition of Aermont arguably positions Keppel as a global asset manager with a real-estate focus. Aermont's growth profile for the next five years to 2028, when the company buys the other half of the asset manager, will be interesting to watch given the macro and real estate environment in Europe,” he says.
“Keppel currently trades at FY2024 P/E of 13.2x and P/B of 1.2x, which we view as far from being egregious, especially considering the company's more stable earnings stream given the divestment of its offshore marine business,” he adds.
Shares in Keppel closed 6 cents higher or 0.85% up at $7.16 on Feb 6.
