Keppel Limited: Flourish and prosper
- FY23 earnings rose 19% y-o-y, better than expected, driven by strong infrastructure earnings
- Raised FY24/25F earnings by 9-14% as we expect higher infrastructure profit
- Declared 19 Scts dividend, bringing full year cash dividend to 34 Scts, decent 5% yield
- Transformation on track; Reiterate BUY with higher TP of S$9.00
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KEY TAKEAWAYS FROM BRIEFING:
Exciting year ahead. Keppel reported historical high profit of S$4bn, driven by strong operating performance and sale of Kepel O&M (S$3.3bn gains). Management expressed optimism and confidence on another exciting year ahead with the improving operating environment especially fund management segment.
Transformation on the fast track. The V2030 transformation plan is progressing very well. Keppel has grown its FUM by 44% from S$55bn as of end FY23 to S$79bn upon completion of the proposed Aermont acquisition in 1Q24, approaching its S$100bn target by 2026. Management is observing growing interest from investors as well. The Aermont deal has lifted Keppel’s profile on the global platform, expanding Keppel’s network of over 50 new global blue-chip LPs. Management also emphasized their engineering and operator capabilities that differentiates them from typical asset managers. The effort to move away from lumpy earnings has also paid off, as recurring income made up c.78% of core profit in FY23, supporting stable returns to shareholders.
Steady infrastructure earnings. During the briefing, there were many questions revolving around sustainability of its stellar infrastructure earnings. It appears that 2023’s strong earnings was not due to one-off factors but sustainable into 2024 and beyond. This is on the back of the better supply/demand dynamics, government measures in place to safeguard the healthy development of the energy sector such as setup of GasCo to manage gas imports and prevent over-contracted gas issues & re-introduction on vesting contracts, Keppel’s competitive advantage in securing gas supply/hedges and power contracts has led to steady spreads. Over 60% of capacity is contracted on fixed or indexed electricity price plans, providing a cushion against power price fluctuations. In addition, Keppel is growing to be a one-stop sustainable solutions provider including not only power but also district cooling, wastewater, decarbonisation solutions etc. This will continue to drive growth of Keppel’s infrastructure business.
Asset monetization – slowly but surely. The pace of asset monetisation has slowed down in view of the unfavourable macro environment. Keppel continues to actively pursue divestment opportunities for identified assets especially its landbank in China. While exiting the less desirable old economy sectors like residential projects in China, Keppel is relooking at its playbook and exploring new business opportunities. Separately, AssetCo’s rigs are seeing good interest and charter contracts. It now has S$950m in cash, which bodes well for possible early redemption of the Notes, which could bring forward the cash inflow.
RESULTS REVIEW:
FY23 results driven by strong infrastructure earnings. Excluding disposal gains of S$3.18bn from yard merger and loss of S$140m from KREIT distribution-in-specie (DIS), FY23 core profit came in at S$996m (+19% yoy) - better than expected. 2H23 net profit (excl KREIT DIS loss) grew 23% y-o-y to ~S$545m, aided by valuation gains.
The star performer was Integrated Power Operations, which benefited from higher tariffs in Singapore, offsetting the weaker than expected recovery of property profits (+11% y-o-y) and slight decline in asset management income (-5%). Connectivity also performed well, up 30% y-o-y.
Infrastructure earnings more than doubled y-o-y to S$699m in FY23, thanks to Integrated Power Operations, which saw higher net generation and margins. Keppel now has ~4.0GW renewable energy portfolio, of which 72.5% is solar, 25% wind and 2.5% hydro.
Real Estate in China is recovering, albeit at slower pace. FY23 net profit dropped 32% y-o-y to S$315m due to KREIT DIS loss of S$111m and lower revaluation gains. Development profits rebounded 11% to S$197m, though this was slower than expected. With government’s recent stance to support the property market, we are hopeful of sequential improvements. Demand in tier 1 & 2 cities remain supportive though project progress seems lagging. Keppel has successfully sold two plot of lands at Tianjin Eco-city.
Connectivity earnings was steady, up 30% y-o-y to S$127m, attributable to higher M1 income. This was partially offset by fair value loss on investment and lower fair value gains on Data Centres.
FUM stood at S$55bn (+10% y-o-y) as of end 2023, growing 44% to S$79bn in 1Q24. Fund under Management (FUM), which is fee-bearing, grew 10% to S$55bn. Taking into account FUM from proposed acquisition Aermont, which likely to conclude in 1Q24, FUM would surge to S$79bn, approaching its 2026 target of S$100bn.
Net gearing increased to 0.9x, from 0.78x as of end 2022. Book value was marginally reduced following the dividend in specie of STM and KREIT shares, which was largely offset by disposal gains recognised. Cash on hand also reduced following the spin-off of Keppel O&M.
Recurring income grew 44% y-o-y to S$773m in FY23, making up 78% of group profit, improving earnings quality and stability. With steady power earnings contributing to two-thirds of recurring income, the current percentage of recurring income of ~70% could be sustainable, lending support to dividend payout.
Attractive dividend yield. Keppel declared a final dividend of 19 Scts, brining full year cash dividends to 34 Scts, translating to c. 5% dividend yield. The payout ratio falls on the upper end of c.60%, which seems sustainable going forward. In addition, Keppel has also distributed dividend-in-specie of shares in Seatrium (S$2.19/share) and KREIT (S$0.17/share) in FY23.
Raising forecasts. We have fine-tuned our earnings forecasts post the decent set of FY23 results and positive outlook guidance. FY24-25 earnings are raised by 9-14% as we now expect the higher infrastructure earnings to be sustainable. SOTP-based target price is thus revised up to S$9 as we roll over our valuation to a higher base in FY24.
FY Dec | 2H2022 | 1H2023 | 2H2023 | % chg yoy | % chg hoh |
Revenue | 3,264 | 3,716 | 3,251 | (0.4) | (12.5) |
Cost of Goods Sold | (2,530) | (2,678) | (2,321) | (8.3) | (13.3) |
Gross Profit | 734 | 1,038 | 930 | 26.7 | (10.4) |
Other Oper. (Exp)/Inc | (523) | (466) | (315) | (39.8) | (32.4) |
Operating Profit | 210 | 572 | 615 | 192.2 | 7.5 |
Other Non Opg (Exp)/Inc | 24 | 31 | 47 | 93.2 | 49.9 |
Associates & JV Inc | 333 | 122 | 201 | (39.7) | 64.6 |
Net Interest (Exp)/Inc | (23) | (122) | (141) | (500.3) | (14.9) |
Exceptional Gain/(Loss) | 21 | 3,182 | (140) | - | - |
Pre-tax Profit | 565 | 3,784 | 582 | 3.0 | (84.6) |
Tax | (135) | (140) | (150) | 10.9 | 7.2 |
Minority Interest | (4) | (12) | (26) | (534.4) | 120.9 |
Net Profit | 425 | 3,638 | 0 | - | - |
Net profit bef Except. | 405 | 445 | 545 | (65.4) | (69.3) |
EBITDA | 672 | 825 | 983 | 46.3 | 19.1 |
Margins (%) |
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Gross Margins | 22.5 | 27.9 | 28.6 |
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Opg Profit Margins | 6.4 | 15.4 | 18.9 |
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Net Profit Margins | 13.0 | 97.9 | 0.0 |
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