Keppel Corp has had a positive year, with improved earnings in the 3QFY2023 and 9MFY2023 ended Sept 30, led by its infrastructure division. While specific numbers were not revealed in the quarterly business update, revenue saw a 5% y-o-y increase to $5.27 billion for the nine months.
According to Keppel, gains in its infrastructure division were driven by its integrated power business, with 100% of its customers locked in with fixed or indexed electricity price plans for the next two years as at the end of September.
This steady income stream is a key reason why CGS-CIMB Research’s Lim Siew Khee and Kenneth Tan have kept their “add” call with a bullish and unchanged target price of $8.70 given Keppel could play a critical role in Singapore’s energy market.
Besides generating power here, it is going to help import low-carbon energy from regional sources. Since the commencement of the 100MW agreement as part of the Lao PDR-Thailand-Malaysia Singapore Power Integration Project in June 2022, the company has already imported more than 260GWh of renewable energy to date.
Over the past couple of years, Keppel has been trying to increase its value by monetising various assets it holds and recycling capital to get better returns. Year to date, the company has monetised some $865 million worth of assets, which is slower than the $1.5 billion monetised in the whole of FY2022. “We think the slower pace of monetisation may be due to the high interest rate environment and weak real estate market in China,” say Lim and Tan.
However, the analysts believe that the pace of asset monetisation for the rigs in the asset company and gradual repayment of the $4.3 billion vendor note receivables to Keppel could accelerate over the next few months given the strong rig utilisation and day rates.
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Similarly, PhillipCapital’s Peggy Mak expects the monetisation pace to pick up from 4Q2023. “The rig assets held under asset company are enjoying strong charter rates, underpinned by higher crude prices. We estimate the divestments of these assets could return cash of about $2.50/Keppel share to Keppel Corp,” writes Mak, who upgraded her call on the stock to “buy” following the recent price correction but with a lower target price of $7.52 from $7.70 to take into account the equivalent of an 18 cents per Keppel share distribution of Keppel REIT units.
At the business update briefing on Oct 19, CEO Loh Chin Hua acknowledged that the slowing economy in China has an impact on the pace of asset recycling. However, he maintains that Keppel is “very serious” about asset monetisation and the target remains $10 to $12 billion by 2026. “It is very important for us, in terms of how we transform Keppel and move to more recurring income and being asset-light,” says Loh.
DBS Group Research analyst Ho Pei Hwa has also kept her “buy” call with a lower target price of $8.05 from $8.30 to reflect the distribution of Keppel REIT units and the target price revisions of Keppel’s listed REITs.
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In her Oct 20 report, the analyst noted that the group’s earnings quality has improved “dramatically” with its proportion of recurring income jumping to 60% since FY2022 compared to 25%–40% previously.
Ho sees the trend continuing given the concerted effort made to pivot away from revenue based on its order book to income from fees and its portfolio assets such as real estate, infrastructure and digital assets. “While its return on equity (ROE) at around 9% is far behind its target of 15%, we look forward to funds under management (FUM) growth and turnaround of property business to drive returns towards this target in the medium term,” says Ho.
She expects Keppel’s core earnings — excluding the sale of its offshore and marine — to grow at a CAGR of 12% in the next two years, driven largely by an expanding base of funds under asset management (FUM) from $50 billion as at the end of 2022 towards $80 billion. If and when Keppel hits its 2030 target of $200 billion, that is worth an additional $4 per share to her target price for Keppel. Furthermore, property and land sales in China and Vietnam look set to recover following their reopening, adds Ho.
Despite the drastic move to get rid of its offshore and marine business, a key catalyst for Keppel’s share price, in the near term, will be the planned monetisation of its legacy assets from this business. No thanks to Middle East tensions spooking the global energy market yet again, demand for oil rigs is expected to increase as operators are drawn by higher oil prices.
The offshore and marine sector is in an upcycle with both shallow and deepwater rig day rates and utilisation rates hitting multi-year highs this year, with forward contracts in 2024 likely to be 10%–20% higher, says Adrian Loh of UOB Kay Hian, who has a “buy” call and $9.09 target price. Keppel shares closed Oct 25 at $6.21, which values the company at 2.77 times historical earnings.
