“Although we see the group's share buyback programme as shareholder-friendly, we believe it may not be the most efficient use of capital as the current share price is close to our valuation,” says Lee in an Aug 1 note.
Following the release of the results on July 31, Keppel’s share price rose 3.6%, says Lee. Keppel shares have pared those gains, however, returning to around 2.3% higher over the past five days.
Lee says Keppel’s core business performance was in line with expectations, with a 7% y-o-y increase in recurring income for 1HFY2025. However, earnings per share (EPS) missed Lee’s estimates, owing to “lower-than-expected gains from the divestment of its non-core property assets”.
As a result, Lee is cutting his FY2025 EPS estimate by 21% after adjusting for lower one-off divestment gains from Keppel’s non-core portfolio.
See also: Keppel 1HFY2025 earnings up 24.2% y-o-y to $377.7 million
Lee is keeping his $8.60 fair value estimate for no-moat Keppel, thinking shares are currently fairly valued. Lee has assigned Keppel a three-star rating against Morningstar’s five-tier scale.
Monetisation
Keppel has established a task force to accelerate disposal timelines and maximise exit values for non-core assets. It has carved out $14.4 billion of assets as “non-core portfolio for divestment” by FY2030, of which $8.8 billion are property-related.
See also: OCBC's Lim cuts fair value for SingPost to 49.5 cents
The outstanding assets comprise legacy offshore and marine assets of some $4.8 billion and embedded cash and receivables of some $2.9 billion.
However, OCBC Investment Research believe it could take “several years” for Keppel to fully monetise these assets, though it targets to complete them by 2030.
After adjustments, OCBC stays “buy” on Keppel with a higher target price of $10.20 from $8.60 previously.
Year to date, Keppel has completed $915 million in divestments and is negotiating an additional $500 million in monetisation deals.
Since October 2020, Keppel has monetised some $7.8 billion out of its target of $10 billion to $12 billion by FY2026.
Infrastructure is the clear driver in the “new Keppel”, say CGS International (CGSI) analysts Lim Siew Khee and Meghana Kande. “The new Keppel will be driven by its current infrastructure division, asset management [and] connectivity (data centres, Bifrost subsea cables, excluding M1).”
Management expects the 600-megawatt (MW) Sakra cogen plant to start earlier than 1H2026 as previously guided. The plant is fully contracted with more than three years of contract.
For more stories about where money flows, click here for Capital Section
Lim and Kande are staying “add” on Keppel with a higher target price of $10.23 from $9.28 previously.
Earnings spurt
Similarly, Phillip Securities head of research Paul Chew expects an “earnings spurt” over the next two to three years.
In an Aug 4 note, Chew maintains his “buy” call on Keppel with a higher target price of $10.50, up from $8 previously.
“We raised our valuations for infrastructure and asset management, driven by the expected earnings spurt over the next two to three years. We also removed the holding company discount due to the virtuous synergies as asset owner and operator across the key divisions of infrastructure, real estate, asset management and connectivity,” says Chew.
According to him, FY2025 should bring “muted” earnings growth, but FY2026 will be a year of growth from Keppel South Central, Keppel Sakra Cogen power plant and Bifrost cables completions.
As at 10.54am, shares in Keppel are trading 6 cents higher, or 0.72% up, at $8.41. Keppel shares have risen 2.68% over the past week.
