DBS calls a buy on Keppel Corp, with $8.30 price target

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 “buy” 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’s net profit rose 3 per cent to $445 million, from $434 million in 2022.

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

The DBS report noted that Keppel’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.

“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).”

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’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’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’s latest results show that its three key business segments – infrastructure, real estate and connectivity – 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.