Analysts are keeping a bullish stance on Keppel Corporation following the announcement of its latest 1HFY2022 ended June results.
To recap, the group on Jul 28 announced that its overall net profit grew by 66% y-o-y to $498 million, due to the group reporting profitability across all segments including its discontinued offshore & marine operations.
The discontinued operations comprise the results of Keppel Offshore & Marine (Keppel O&M), excluding certain out-of-scope assets and other group adjustments. Excluding the operations from Keppel O&M, Keppel Corporation’s earnings or net profit attributable to shareholders increased by 26.4% y-o-y to $434.1 million for the half-year period.
During the 1HFY2022, Keppel Corporation reported revenue from continuing operations of $3.36 billion, up 16% y-o-y, thanks to a “significant” increase in contributions from the group’s energy & environment and asset management segments, which more than offset the decline in urban development’s revenue.
Following the announcement, PhillipCapital, OCBC Investment Research and UOB Kay Hian are keeping their “buy” recommendations on the stock with target prices of $8.95, $8.78 and $10.11, respectively.
The way PhillipCapital analyst Terence Chua sees it, he like that the group is transforming into an asset light recurring income model. “We welcome the bolder statements made on Keppel Land’s transformation to be asset-light. We believe this will not only crystalise the value of its landbank, but it will also allow the group to re-invest the proceeds into new growth areas and share some of the gains with shareholders through dividends,” says Chua.
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Thus far, about $710 million of assets have been monetised ytd, bringing the cumulative amount announced to $3.6 billion since October 2020. While the group’s management remains confident of exceeding its $5 billion target by end-2023, Chua expects the conclusion of the proposed O&M transactions, still on track for completion by end-2022, to move the group past its $5 billion target.
Chua has upped his target price to $8.95 from $7.07 previously. On the increase, he says: “We revised our valuation on Keppel O&M (KOM) and Keppel Land after greater clarity on its monetisation path. We valued the group based on the four new segments unveiled during Vision 2030 to better reflect the group’s reporting segments going forward.”
The target price translates to about 1.2x FY2022 P/B, a slight premium to its historical average as the group’s transformation plans gain traction and ROE expands to 8.8%.
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Meanwhile, the OCBC Investment Research team sees Keppel Corp as an outperformer so far this year with its transformation strategy .
Since the start of the year, the group has delivered total returns of 36% (based on July 28 close), significantly outperforming the broader Straits Times Index which has returned 5% over the same period. Besides the strong earnings announcement for FY2021, during which the group reported net profit of $1.02 billion (highest achieved in the past six years since the O&M downturn), the sector has been buoyed by better industry fundamentals.
The research team also views the recent 1HFY2022 results as encouraging, with the group reporting 1HFY2022 PATMI of $498 million, forming about 57% of its full year forecast. 1HFY2022 dividend was 15 cents, higher than expectations. As final dividend per share (DPS) is normally higher than interim, the research team has increased its FY2022 DPS forecast from 26 cents to 31 cents.
On the other hand, UOB Kay Hian’s Adrian Loh says: “Keppel Corp reported net profit from continuing operations of $434 million, up 26% y-o-y and better than expectations due to strong contributions from the infrastructure and asset management businesses. We remain cautiously optimistic that its China property business would turn around in the medium term.”
Apart from being upbeat on Keppel Corp’s recent earnings that met expectations, Loh sees the group’s asset management (AM) business growing and is upbeat on its prospects. From a reasonably small business unit a few years ago, Keppel Capital is now a meaningful contributor to Keppel Corp’s bottom line, generating $155 million (+32% y-o-y) or 36% of the company’s net profit from continuing operations in 1HFY2022.
The AM business saw higher fee income from successful acquisitions by its REITs and trusts and also benefited from higher fair value gains on investment properties and data centres.
During the analyst call, Loh noted that management expects further growth in funds under management given that investors have increasingly sold bonds in favour of exposure to alternative assets.
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Meanwhile, as at end-1HFY2022, Keppel Offshore & Marine (Keppel O&M) had $4.4 billion in net orderbook with a further $8 billion worth of potential contracts in advanced discussions. Importantly, the company managed to garner $255 million worth of bareboat charters for four of its legacy rig assets (which are not going into the Sembcorp Marine merger).On this, management is also confident that it would be able to sell its other rigs sooner rather than later given the more bullish offshore marine environment.
While Loh is optimistic on the group’s China property business in the medium term, the China segment now is facing major headwinds because of the property developers facing a deleveraging process and the zero-Covid strategy.
As a result, the country’s big developers have experienced over 50% y-o-y decline in units sold while Keppel Corp saw a 69% y-o-y decline in 1HFY2022. This has been somewhat offset by prices which have held up well given government policy support.
However, Loh notes that more recent data in June appears to show a nascent recovery, especially in areas where the group has interests. Its management revealed that as part of its financial reporting process, it had reviewed its projects under development and concluded that there is currently no need for any impairments across. “We remain cautiously confident that China and its property market will turn around in the next six to nine months,” says Loh
As at 12.45pm, shares in Keppel Corp are trading at $6.92.
