Keppel Corp: Steady 3Q performance
- 3Q/9M23 earnings higher y-o-y, driven by Infrastructure; power spreads to remain steady despite lower USEP in 3Q
- KREIT’s DIS goes ex on 25 Oct; reduced FY23/24F earnings by 1/5% to reflect lower KREIT stake
- CFO retiring end of this year, succeeded by current deputy CFO; no impact on operations expected
- Reiterate BUY; TP adjusted to S$8.05 to reflect KREIT distribution and TP revisions of listed REITs
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Singapore Power business under the spotlight.Infrastructure segment, in particularthe Integrated Power Operations, was the star performerin 1H23, offsetting the weakness in the Real Estate segment. There were concerns on the profitability of Singapore power earnings in 3Q23, in view of the decline in Uniform Singapore Energy Price (USEP, -35% y-o-y; -44% relative to 1H23 average) following government measures to reduce electricity price volatility.
Management guided thatat least 60-65% of power capacity (total 1.3GW) is contractedand assured thatspreads remained fairly steady in 3Q23, which translated tohigher power earnings y-o-ydespite the decline in USEP (and thus revenue). This is attributable to improvement in efficiency and their proprietary ways of managing their generation and sale of electricity.
Low carbon energy importation was in focusas well given Keppel’s license to import ~1.4GW of low carbon energy (c.35% of Singapore’s 4GW target by 2030) from neighbouring countries such as Cambodia, Indonesia, Malaysia and Laos. This is still at a preliminary stage and details on importation plans and capex were not disclosed. In terms of clean energy, Keppel also has ~3.0GW renewable energy portfolio, largely in Europe. Of which 65% is solar, 32% wind and 3% hydro.
Real Estatein China remains challenging though, we are seeing light at the end of tunnel. Home sales rose 55% y-o-y to 2,620 units in 9M23, driven largely by China and India, which both saw nearly doubling of home sales to 1,460 and 1,030 units respectively. It successfully sold two plot of lands at Tianjin Eco-city, one of which recorded S$14m profit in 1H23 and the other plot is expected to fetch a similar profit in 2H23.
Net gearingincreased slightly to 0.89x, from 0.86x as of end Jun-2023 and 0.78x as of end 2022. This could head higher marginally by 0.02x post distribution of KREIT shares due to lower Group book value. Management is mindful of the gearing level and aims to keep net gearing below 1x.
Outperformed its asset monetisation target. Keppel has announced S$865m worth of divestments YTD (including S$323m from KREIT distribution), lifting total assets monetized to S$5.3bn, outpacing the target of S$3-5bn by year end. Keppel continues to work towards achieving S$10-12bn of divestments by end of 2026.
Special dividend for KREIT shares goes ex on 25 Oct.The proposed special dividend for KREIT shares, in conjunction with Keppel’s 55th year anniversary, was approved at an EGM on 18-Oct. Keppel shareholders will receive 1 KREIT share for every 5 Keppel shares held as special dividend. Based on closing price of S$0.835 on 18-Oct, the special dividend is worth c.16.7Scts / Keppel share. Post distribution, Keppel’s NTA is expected to drop by S$420m or ~24 Scts per share while P&L could register a non-cash accounting loss of ~S$140m, which we consider it as one-off.
We have lowered our FY23/24F earnings forecasts by 1/5% and TP by 25 Scts/share to account for the KREIT distribution and adjustment in listed REITs’ forecasts and TPs.
Promising dividends; no further plans for share buyback. Besides KREIT’s dividend-in-specie, Keppel has also paid 15 Scts interim dividend. Assuming a similar final dividend, total cash dividend payout for 2023F would amount to 30 Scts, implying decent 4.8% dividend yield (excl KREIT special dividend). Management sees no pressing need to extend share buyback program at this point.
Retirement of CFO. Mr. Chan Hon Chew will be retiring on 31-Dec-2023 after serving as CFO of Keppel for c.10-years. Current deputy CFO, Mr. Kevin Chng will succeed him as new CFO. Mr Chng joined Keppel in 2016 and had held various senior positions including GM of Group Risk and Compliance and CFO of Keppel O&M. We find comfort that Keppel has placed much emphasis on senior leadership succession plans and thus not expecting operational disruption following the retirement of Mr Chan.
Asset Management made two acquisitions for the education fund and achieved encouraging first closing of Infrastructure fund in Oct-2023.Next in line would be the first close for Keppel Sustainable Urban Renewal (SUR) Fund. There are also new funds for infrastructure, data centres and debt planned for launch in the next 2 years. In terms of deployment, there is a robust deal pipeline with over S$13bn of assets and M&A deals being pursued across Infrastructure, Real Estate, and Connectivity.
Keppel Core Infrastructure Fund (KCIF), its flagship open-ended infrastructure fund with an initial target size of US$2.5bn, has successfully achieved its first closing with initial capital and co-investment commitments of US$575m, as announced in a press release on 13-Oct. The robust demand reflects the appeal of critical infrastructure assets with inflation-protected cash flows.
Keppel Education Asset Fund (KEAF) acquires two assets in Sydney. On 12-Oct, Keppel announced that its private fund – KEAF - has acquired two assets in Sydney for A$198m (approx. S$175m), lifting Keppel’s portfolio of assets in Australia to A$4.8bn (approx. S$4.3bn; assets in the key cities of Sydney, Melbourne and Perth, including infrastructure, prime commercial assets and data centres).
Adding on to KEAF’s existing two education assets in Singapore and Japan, the two newly acquired assets in Sydney are:
- An existing purpose-built campus. strategically located in Kensington, which is a 15-minute drive or 20 minutes bylight rail to the Sydney central business district. The property with total net lettable area of approx. 10,700 sm is currently fully leased to the University of New South Wales (UNSW) on a long-term basis.
- A seven-storey commercial building in North Sydney to be acquired under a forward purchase agreement. Extensive asset enhancements would be carried out to the existing building to upgrade and convert it to a K12 independent school campus, which will yield a total net lettable area of approx. 9,150 sm. Located within the Ward Street Precinct in the heart of the North Sydney central business district, the property is well connected by major arterial roads and public transportation nodes with the soon-to-be-completed Victoria Cross metro station. The property comes with pre-commitment from a leading global operator of premium schools for a long-term lease.
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