Analysts are remaining positive on Keppel after the group reported total earnings of $304.1 million for the 1HFY2024 ended June 30, 91.6% lower y-o-y. Last year’s earnings included $3.2 billion from the group’s discontinued operations, mainly thanks to the $3.3 billion gain netted from the sale of Keppel Offshore & Marine (O&M).
PhillipCapital analyst Paul Chew has upgraded his call to “buy” from “accumulate” due to the group’s recent share price weakness.
However, Keppel’s revenue and adjusted patmi for the 1HFY2024 stood below Chew’s expectations at 42% and 37% of his full year forecast respectively.
Keppel’s adjusted patmi for the six-month period fell by 25% y-o-y to $346 million due to losses in its real estate division while headline earnings were dragged by the group’s legacy assets including fair value losses at Seatrium, RigCo notes receivables and losses on its associate Floatel, Chew notes.
These were offset by a surge in asset management profits, which more than doubled to $75 million from $30 million in the 1HFY2024, he adds. “All the growth came from an 11-fold jump in fee income from the infrastructure division largely due to Keppel Infrastructure Trust A7RU 's (KIT) performance and management fees.”
Despite the upgrade, Chew has lowered his target price to $7.60 from $7.98 as he raises his revalued net asset value (RNAV) discount on Keppel’s property division.
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He has also cut his revenue and earnings forecast for the FY2024 by 12% and 20% respectively to account for the weak real estate and associate earnings.
In 2HFY2024, though, Chew expects the group’s operating earnings to be stable with earnings backed by long-term contracts from its infrastructure division; recovery with more project recognition in China and Vietnam in its real estate division; and the commencement of Keppel data centre SGP8 at Genting Lane in 3QFY2024 for its connectivity division.
“Operationally, we expect earnings to be under pressure from the decline in property development sales. The key share price driver will be the monetisation of Rigco and Floatel,” he says.
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CGS International analysts Lim Siew Khee and Kenneth Tan have also lowered their target price and earnings estimates as Keppel’s 1HFY2024 net profit missed their estimates.
Lim and Tan’s new target price is now at $8.28, down from $8.98 previously.
“Keppel’s 1HFY2024 net profit of $304 million (-31% h-o-h, -32% y-o-y) was a miss at 30% of our and 31% of Bloomberg consensus’ FY2024 forecasts,” they write in their Aug 1 report. The miss was due to weaker-than-expected profit from Keppel’s infrastructure arm, higher-than-expected losses from Floatel and fair value losses from its vendor note of $22 million. There were also fair value losses from Seatrium’s shares, the analysts note.
As a result, they have cut their earnings per share (EPS) estimates for the FY2024 to FY2026 by 13% to 17% on lower estate development profits and higher losses from legacy assets. The lower target price is due to discount ascribed to its China real estate assets.
In 2HFY2024, the analysts expect to see higher profit on a h-o-h basis from higher profits in Keppel’s Infrastructure and real estate and narrower losses from its legacy assets.
They have also removed Keppel from their country picks as monetisation of its assets may take time.
In FY2024, the analysts are positive that Keppel can sustain its FY2023 dividend of 34 cents with proceeds from the monetisation of its assets, including the utilisation of Seatrium shares that were divested and kept in a segregated account. Lim and Tan have kept their “add” call on Keppel.
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DBS Group Research analyst Ho Pei Hwa is keeping her “buy” call with an unchanged target price of $9 on Keppel as she sees the group as an “underappreciated” rate cut beneficiary.
Based on her estimates, Keppel’s core profit of $513 million for the 1HFY2024, excluding losses for its legacy O&M assets, was broadly in line.
In her Aug 2 report, Ho sees “promising earnings growth” ahead with core earnings – excluding its O&M sale – to grow at a compound annual growth rate (CAGR) of 10% in the next two years. This is driven largely by an expanding funds under management (FUM) base under asset management from $50 billion as of FY2023 to $80 billion.
“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 in 2HFY2024 with stability of economic conditions,” she points out.
Following Keppel’s results, Ho notes that the group’s earnings quality has improved “dramatically” with its recurring income contribution to gross profit jumping to 60% to 80% since 2022, up from 25% to 40% before Vision 2030.
“The trend should continue with concerted efforts made to pivot away from orderbook-based revenue to income from fees and from its portfolio assets (real estate, infrastructure, and digital assets),” says Ho. “While its return on equity (ROE) at 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.”
The OCBC Investment Research team has also kept its “buy” call and target price estimate of $8.60 as they recognise Keppel’s continue transformation into a global asset manager and operator.
Morningstar Equity Research analyst Xavier Lee has rated Keppel “four stars” with an unchanged target price of $8.60 as he sees Keppel’s longer-term earnings estimates remaining intact despite the net profit miss in the 1HFY2024.
Lee has reduced his EPS For FY2024 by 14% after factoring in losses from its legacy assets. He has also lowered his FY2025 to FY2026 EPS estimates by 3% to 5% after reducing his forecasts of share of profits from associated companies and joint ventures.
Shares in Keppel closed 6 cents higher or 1.01% up at $5.98 on Aug 7.
