Analysts have all kept their “add” and “buy” calls on Keppel Limited after the group issued an update for the 3QFY2024 ended Sept 30 on Oct 24. Morningstar has kept its “four star rating”. The analysts from CGS International (CGSI), Citi, Morningstar, PhillipCapital and UOB Kay Hian have also maintained their target prices at $8.28, $8.93, $8.60, $7.60 and $8.89 respectively.
While key financials were not disclosed in the update, the group revealed that its net profit for the 9MFY2024 was “stable” y-o-y, excluding effects of its legacy offshore and marine (O&M) assets. Recurring income for the period grew by 14% y-o-y with higher contributions from asset management and operating income.
“We believe [Keppel’s] 3QFY2024 net profit declined due to lower real estate earnings,” says PhillipCapital analyst Paul Chew.
Citi Research analyst Brandon Lee thought the same, with Keppel’s 3QFY2024 net profit down y-o-y due to a lack of valuation and divestment gains from the group’s connectivity segment. However, he believes this will be offset by improved clarity and growing ambitions from Keppel’s data centre (DC) business, its new target for power capacity, an improved fund management environment and a pick-up in asset monetisation activities.
Notwithstanding the absence of key financials, the group revealed an improved set of disclosures around its data centre (DC) business.
Data centres and power capacity
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“For the first time, Keppel announced its total DC gross power capacity of 650 MW (70% is operational) across 35 assets, with the bulk of capacity under development set to come online between 4QFY2024 to FY2027,” say CGSI analysts Lim Siew Khee and Kenneth Tan.
In its update, Keppel said it intends to expand its current DC capacity from 650 MW to 1.2 GW “in the near-term” with an additional $10 billion funds under management (FUM) growth.
According to Keppel CEO Loh Chin Hua, the FUM growth from $9 billion to $19 billion will mostly be organic.
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“We do see quite a lot of deal flow. The demand is quite strong for data centres in the areas that we are operating in. The way to think about this is that for Keppel DC Fund III, we expect to reach about US$2 billion ($2.64 billion), but many of these investors that we work with, the limited partners, like to co-invest as well,” Loh told media and analysts at the results briefing.
“So this new DC fund could reach, with co-investments, up to US$3 billion, with leverage, etc., the FUM is close to $10 billion. So that is how we get to the $10 billion,” he explains.
As most of these DCs will be built greenfield, the group will probably take three to five years to reach its goal. However, it added that it is open to inorganic opportunities, should they arise.
“In addition to Asia, Keppel intends to support Aermont via potential inorganic DC opportunities in Europe,” write Lim and Tan.
Morningstar’s equity analyst, Xavier Lee, says he likes the group’s strategy to focus on the data centre market, which is currently enjoying “strong demand” from the technology sector.
With its data centre development at Genting Lane, Singapore, management said it is ready to be monetised and will issue updates when there are new developments, he notes.
“Another key sharing by the group was its roadmap to double its power generation capacity in Singapore to 3 GW by 2030 from the current 1.5 GW. This is to meet Singapore’s peak electricity demand, which is forecast to grow at a compound annual growth rate (CAGR) of 4.8% between 2024 and 2030,” he adds.
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To UOB Kay Hian analyst Adrian Loh, Keppel’s DC growth could come from opportunities in Asia Pacific. Keppel had mentioned artificial intelligence (AI) campuses in Malaysia, Indonesia and India, he notes.
“Management stated that these DC assets could be injected into Keppel DC REIT in due course, with both of its DC buildings at Genting Lane ready for divestment in the very near term,” the analyst writes.
To support Singapore’s growing energy needs, Keppel’s infrastructure segment says it plans to double its energy supply to 3.0 GW by 2030 through power generation and regional importation.
This will be helped by incremental 0.6 MW from Keppel Sakra Cogen Plant by FY2026, 0.3 MW from import of solar power from Indonesia in FY2028 and 0.6 MW from potential addition of a combined cycle gas turbine (CCGT) plant in FY2030 and a zero or low-carbon power generation source, note Citi’s Brandon Lee and Morningstar’s Xavier Lee.
“Data centres will be a key off-taker for imported energy,” says PhillipCapital’s Chew.
“Of the $25 billion deal flow pipeline, $10 billion/$10 billion/$5 billion are from [Keppel’s] infrastructure/real estate (including from Aermont Capital)/connectivity, with possibility of closing infrastructure and connectivity deals higher given greater interest,” notes Citi’s Lee. “Aermont is looking for inorganic opportunities in Europe (supported by Keppel) and there is also opportunity to work with Aermont on brownfield/greenfield opportunities.”
“Given that there are healthy transactions (including Sembcorp Industries U96 ’ acquisition of [a] 30% stake in Senoko Energy in September) in Singapore’s power market, it suggests that power demand is very healthy, though Keppel will look to increase power generation through RFPs ([or] requests for proposals),” he adds. “We note Energy Market Authority (EMA) launched a 2nd RFP in June for new generation capacity to meet growing electricity demand, with the RFP inviting the private sector to build, own and operate 2 hydrogen-ready CCGT generating units (each to be at least 600 MW) to be ready in 2029 and 2030.”
Divestments and asset monetisation plans
In the 9MFY2024, Keppel announced that it conducted $733 million in asset monetisations yet, and it will continue to do so for its real estate portfolio especially in China, Singapore (including Keppel South Central) and Vietnam, notes Citi’s Lee.
However, the group was unable to share exactly when the gains from the divestment of its 70% stake in Saigon Sports City and its 16% stake in Saigon Centre Ph 3 will be recognised due to the approval process, which is “taking a bit longer”, he adds.
“We estimate Keppel sold 347 residential units in China in 3QFY2024 alone, up 53% q-o-q,” Lee writes. “As for its Asset Co vendor notes, conditions for the offshore market continue to improve and Keppel expects some monetisation next 12-18 months.”
PhillipCapital’s Chew likes that Keppel has multiple assets that are ready to be divested.
“The company updated that operating conditions in RigCo continue to improve, and some monetisation is possible in 12 months - 18 months. Another asset primed for monetisation is two data centres in Genting Lane (Keppel DC Singapore 7 operational and 8 being completed),” Chew notes. “Both assets are booked at cost and market valued when closer to operating. Around $453 million of properties in Saigon have been sold but are pending recognition and approval.”
In addition, the group’s Bifrost submarine cable is enjoying a “significant uplift” in pricing, and the focus is getting the system ready for service next year.
UOB Kay Hian’s Loh also sees the Bifrost as a new source of revenue stream for the group in FY2025 when it begins operations.
“Bifrost is a 10.4Tbps 20,000 km trans Pacific cable system connecting Singapore to the west coast of the US that is expected to start operations in 2025. Unlike other trans-Pacific cables, Bifrost takes a southern route via Indonesia and the Philippines, thus avoiding Hong Kong/China,” he writes.
“The Bifrost consortium comprises Meta, PT Telekom and Amazon with KEP being a shareholder, as well as the operations and maintenance provider. Management stated that it is seeing strong demand for its fibre pairs, although it did not disclose how many pairs it owns. As a result, prices have ‘more than doubled’ since the sale of its first pair in 2021,” he adds. “The company commented that each fibre pair can generate $200 million in operations and maintenance fees over 25 years.”
Even though the UOB Kay Hian analyst sees Keppel’s asset monetisation as being on track, CGSI’s Lim and Tan thinks the group needs to ramp up its monetisation efforts in the coming quarters to hit its FY2026 cumulative target of $10 billion to $12 billion, which indicates a yearly monetisation rate of $1.5 billion to $2.2 billion.
To Citi’s Lee, Keppel’s asset monetisation, which picked up the pace in 3QFY2024 with about $453 million assets sold, has “helped [Keppel’s] on-balance-sheet assets declining by 15% to $27.5 billion since end-FY2021”.
Positive share price impact; shares ‘undervalued’
Following its update, Citi’s Brandon Lee believes there should be a positive impact on Keppel’s share price due to the improved disclosure on its DC business.
Morningstar’s Xavier Lee thinks that the group’s shares are “undervalued” and that it is “well-positioned” to ride on “strong secular growth trends in the infrastructure and DC markets”.
CGSI’s Lim and Tan continue to like Keppel for its improving quality of earnings and its asset monetisations. “[A] better appreciation of DC profits should be supportive of longer-term re-rating opportunity.”
UOB Kay Hian’s Loh believes that earnings from Keppel’s infrastructure segment will be underpinned by 70% of the group’s contracted generation capacity in Singapore being locked in for three years or more.
“Importantly, its asset-light strategy appears to be gaining momentum given that the assets on its balance sheet have declined in parallel with a significant jump in its FUM,” he says. “Keppel currently trades at FY2024 P/E of 13.1 times and P/B of 1.1 times 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.”
PhillipCapital’s Chew sees that the lack of real estate sales will pressure Keppel’s earnings in FY2024.
“FY2025 will likely be the timeline for monetising legacy and infrastructure assets, supported by a lower interest rate environment. The demand for data centres has spurred growth and valuations in asset management, infrastructure, and connectivity divisions,” he says.
Shares in Keppel closed 3 cents lower or 0.46% down at $6.48 on Oct 28.
