Keppel Corporation BN4 -0.41% has disposed of another 50 million shares in Seatrium S51 0.74% for a total consideration of $7.26 million, or 14.52 cents each.

 

The disposal, which amounts to a 0.07% stake in Seatrium, was done via the market on July 28.

 

Seatrium had reported a loss of $264.4 million for the 1HFY2023 ended June 30. It was the group' s first-ever results announcement for the six-month period since the completion of the combination with Keppel Offshore & Marine (Keppel O& M) &ndash now Seatrium O& M &ndash on Feb 28. Analysts had remained mostly positive about the O& M group' s prospects after its results.

 

The recent disposal comes after Keppel sold some 42 million shares in Seatrium for $5.17 million, or 12.3 cents each, on June 5.

 

After the latest transaction, Keppel has an interest in 2.1496% of the shares in Seatrium.

Analysts from CGS-CIMB Research, DBS Group Research and UOB Kay Hian are all keeping their respective &ldquo add&rdquo , &ldquo buy&rdquo and &ldquo buy&rdquo calls on Keppel Corporation BN4 -0.41% following the group&rsquo s results for the 1HFY2023 ended June 30. The analysts have also kept their target prices unchanged at $8.70, $8.30 and $9.09 for CGS-CIMB, DBS and UOB Kay Hian respectively.

 

On July 27, Keppel reported record-high earnings of $3.6 billion as it booked gains of $3.3 billion from the disposal of its offshore & marine (O& M) unit during the 1HFY2023.

 

Excluding the discontinued O& M operations, Keppel&rsquo s net profit stood at $445 million, which stood in line with the analysts&rsquo expectations from all three brokerages.

 

For CGS-CIMB&rsquo s Lim Siew Khee and Kenneth Tan, Keppel&rsquo s net profit of $445 million stood at 45% of their FY2023 estimates. &ldquo We give credit to the infrastructure segment as net profit rose 109% y-o-y to $291 million, lifted by strong integrated power and recurring income,&rdquo they write in their July 28 report.

 

&ldquo Profit contribution from [Keppel&rsquo s] energy as a service (EaaS) was not disclosed but the contracts momentum has been strong with year-to-date (ytd) wins of $1.2 billion in Singapore, Vietnam, and Thailand,&rdquo they add.

 

The analysts believe Keppel&rsquo s earnings could be stronger in the 2HFY2023 thanks to more deals and earnings for its EaaS segment, in particular, to be &ldquo more material&rdquo from FY2024 onwards.

 

That said, the key highlight to Lim and Tan was Keppel&rsquo s special dividend-in-specie (DIS) of 1 Keppel REIT K71U -0.56% unit for every five Keppel shares. The DIS, in addition to the group&rsquo s interim cash dividend of 15 cents, was made to celebrate its 55th anniversary.

 

The proposed distribution is pending approval from Keppel&rsquo s shareholders at an extraordinary general meeting (EGM) to be held. Should the proposed distribution go through, Keppel&rsquo s stake in the REIT will be reduced to around 37.1%.

 

&ldquo We were positively surprised by the 55th anniversary DIS of 18.4 cent Keppel REIT shares per Keppel share. Including [its] interim distribution per share of 15 cents, [Keppel&rsquo s] 1HFY2023 yield [is] at 4.8%,&rdquo write the CGS-CIMB analysts.

 

They add: &ldquo We think Keppel is advancing to become a global alternative real asset manager, [although] downside risks [are a] weak macro [environment] that weakens fund performance and slows the pace of capital recycling.&rdquo

 

DBS&rsquo s Ho Pei Hwa has also viewed the special DIS of Keppel REIT units as a positive factor, in addition to its &ldquo promising earnings growth&rdquo ahead.

 

The analyst has projected Keppel&rsquo s core earnings, excluding the sale of its O& M unit, to grow at a compound annual growth rate (CAGR) of 12% in the next two years.

 

&ldquo [This is likely to be] driven largely by an expanding funds under management (FUM) base under asset management from $50 billion as of end-FY2022 towards $80 billion,&rdquo Ho writes.

 

&ldquo In the medium term, Keppel aims to double its FUM to $100 billion by FY2026 and quadruple to $200 billion by FY2030, which we estimate can add $4/share to our current target price,&rdquo she adds. &ldquo In addition, property and land sales in China/Vietnam look set to recover following their reopening.&rdquo

 

Referring to Keppel&rsquo s 1HFY2023 net profit, which stood in line with her estimates, Ho notes that the group&rsquo s earnings quality has &ldquo improved dramatically&rdquo . For the six-month period, the group&rsquo s contribution from its recurring income business to its overall profit jumped from 25% to 40% prior to Vision 2030 to around 60% in FY2022.

 

&ldquo The trend should continue with concerted effort made to pivot away from orderbook-based revenue to income from fees and from its portfolio assets (real estate, infrastructure, and digital assets). While its return on equity (ROE) at [around[ 9% remains far behind its target of 15%, we look forward to FUM growth and turnaround of property business to drive returns towards this target in the medium term,&rdquo Ho writes in her July 28 report.

 

Like CGS-CIMB&rsquo s Lim and Tan, Ho looks forward to a &ldquo better&rdquo 2HFY2023 from Keppel with a &ldquo potential conclusion of asset management deals and divestments&rdquo .

 

Ho is also very buoyant about the group&rsquo s prospects, noting that it offers investors a &ldquo unique and unrivalled proposition as a global asset manager with developer and operator capabilities in real estate and green industrial space (energy & environment and infrastructure).&rdquo

 

&ldquo We believe that Keppel&rsquo s strong engineering/construction roots and track record in capital management positions it well to grow as a global asset manager,&rdquo she says.

 

However, she warns that a slower-than-expected FUM growth, revaluation loss and the impairment of non-core assets could pose downside risks to her forecasts.

 

Finally, UOB Kay Hian&rsquo s Adrian Loh also liked Keppel&rsquo s &ldquo solid set&rdquo of results for the 1HFY2023, which came within his expectations.

 

&ldquo The two key highlights were the continued strength in its infrastructure business which saw a doubling of its segmental net profit, as well as the DIS of Keppel REIT,&rdquo says Loh in his July 28 report.

 

&ldquo The company guided for increased transaction newsflow in 2HFY2023 for its asset monetisation programme which could be a key share price driver,&rdquo he adds.

 

Like his peers, Loh is upbeat about Keppel&rsquo s goal to become a group that is more asset-light with a solid recurring earnings stream.

 

&ldquo [The group], post the Keppel O& M divestment&hellip should eventually achieve its 15% ROE target versus 8.3% in 1HFY2023,&rdquo he says.

 

&ldquo In the near term, we believe that the market will focus on Keppel&rsquo s asset monetisation announcements as this could bolster earnings in 2HFY2023 and into FY2024,&rdquo he adds.

SINGAPORE - Keppel Corp offers investors a unique and unrivalled proposition as a global asset manager with developer and operator capabilities in real estate and green industrial space, said DBS Group.

In a report dated July 27, DBS stamped a &ldquo buy&rdquo on Keppel and a 12-month price target of $8.30 on the stock. Keppel closed at $7.20 on Friday.

The report comes as Keppel Corp unveiled a record first-half net profit of over $3.6 billion, a sevenfold leap from the $498 million recorded in the same period in 2022. While this was thanks to a one-off gain of some $3.3 billion from the divestment of Keppel Offshore & Marine, on a continuing operations basis Keppel&rsquo s net profit rose 3 per cent to $445 million, from $434 million in 2022.

DBS analyst Ho Pei Hwa wrote: &ldquo We believe that Keppel&rsquo s strong engineering/construction roots and track record in capital management position it well to grow as a global asset manager.&rdquo

The DBS report noted that Keppel&rsquo s earnings quality has improved dramatically, with recurring income contribution to group profit jumping from 25 per cent to 40 per cent prior to its Vision 2030 plan, to 60 per cent in 2022.

&ldquo The trend should continue with concerted effort made to pivot away from orderbook-based revenue to income from fees and from its portfolio assets (real estate, infrastructure, and digital assets).&rdquo

Keppel unveiled its Vision 2030 strategy in May 2020. From a conglomerate of diverse parts, it refocused its portfolio to one of an integrated business, providing end-to-end solutions for sustainable urbanisation, with an asset management arm to fund growth and provide for capital recycling.

DBS projects Keppel&rsquo s full-year net profit at $4.1 billion, and $921 million on a continuing operations basis (that is, excluding one-off gains).

It added that while Keppel&rsquo s return on equity at about 9 per cent remains far behind its target of 15 per cent, it expects that the growth in funds under management and turnaround of its property business will drive returns towards this target in the medium term.

Since its asset monetisation programme began in October 2020, Keppel has achieved $4.8 billion in cumulative asset monetisation, and expects to hit its target of $12 billion in cumulative asset monetisation by end-2026. It monetised $420 million of assets during the first six months of 2023.

The company managed some $53.2 billion in funds and $65.6 billion in assets under management, largely in infrastructure and real estate.

DBS said its target price of $8.30 implied a price-to-earnings ratio of 16 times and a price-to-book ratio of 1.3 times.

Keppel&rsquo s latest results show that its three key business segments &ndash infrastructure, real estate and connectivity &ndash were profitable and helped the company deliver a total return on equity of 36.8 per cent and free cash flow of $732 million in the first half of 2023, compared with $127 million in 2022.

The company announced a first-half interim dividend of 15 cents per share, which is the same as the previous year.

In addition to the cash dividend, Keppel is proposing to reward shareholders with a special 55th anniversary dividend in-specie of one Keppel Reit share for every five Keppel shares held.

* Pse Dyodd.......