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Keppel’s record performance does not include billions in potential monetisation

Goola Warden
Goola Warden • 9 min read
Keppel’s record performance does not include billions in potential monetisation
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Keppel, which dropped “Corporation” from its name on Jan 1, has seen a 36% rise since its March 2023 low and an 82% increase from its 2020 pandemic low. Despite this, its share price is still below the highs from the oil and gas (O&G) and offshore and marine (Q&M) boom era when Keppel’s O&M unit was the world’s largest jack-up rig builder.

Despite Keppel’s record profits and outperformance compared to the Straits Times Index (STI), the company’s asset monetisation plan, capital-light model, and funds management strategy could lead to higher ROEs (return on equity) and cash flow in the coming years. It is uncertain whether its share price will reach double digits again, but the growth potential exists.

When Keppel announced its FY2023 ended December 2023 results on Feb 1, it reported a net profit of $4.067 billion, its highest profit in 55 years. Net profit from continuing operations was $996 million in FY2023, 19% higher y-o-y. 

In FY2023, the main sectors contributing to net profit were infrastructure at $699 million, up 135% y-o-y, real estate at $426 million, down 8% y-o-y and connectivity at $127 million. And, of course, there is the one-off gain of more than $3 billion from the divestment of offshore and marine. According to Keppel’s announcement, it booked a $111 million loss on distribution-in-specie of Keppel REIT units to Keppel shareholders. 

Previously, most of Keppel’s earnings were from the “lumpy” O&M order book business and the property trading business. “Today, Keppel is no longer a rig builder or property developer. We are a global asset manager and operator, with complementary segments in Infrastructure, Real Estate and Connectivity,” says group CEO Loh Chin Hua on Feb 1 in a prepared statement. 

“We were encouraged by Keppel’s strong recurring income growth of 54% in FY2023 to S$773 million, contributing 88% of FY2023 net profit (FY2022: 60%). Infrastructure was the largest recurring earnings driver (+90% y-o-y),” says a CGS-CIMB Research report.

See also: Five Singapore-listed ‘dividend diamonds’ to watch beyond banks and REITs

Last year, Loh announced the conversion of Keppel from a conglomerate to a global alternatives asset manager and operator, focusing on growing its funds under management (FUM) to $200 billion. This means that Keppel is not just a Blackstone or Brookfield but a combination of an asset manager, asset owner and operator.

In the data centre sphere, Keppel is akin to a Digital Realty or Equinix as it owns both Keppel DC REIT and is an operator of data centres. In the property realm, it is like CapitaLand Investment and CapitaLand Development combined, as Keppel is both a developer and an owner of Keppel REIT and the manager of other funds. In infrastructure, Keppel is both a Blackstone or Brookfield and a Bechtel. It owns the funds, trusts and REITs that are offtake vehicles for the build-and-operate part of the business.

See also: The Renaissance Trade

Monetisation to pick up

In November, Keppel announced the acquisition of a privately-held property fund manager, Aermont Capital, which manages mainly European commercial real estate. 

In the prepared statement on Feb 1, Loh said: “2023 has been one of the most transformational years in Keppel’s history. Amidst the volatile global environment, we took pivotal steps to transform Keppel, starting with the successful divestment of the offshore and marine business, which allows us to realise some $9.4 billion in value over time.” 

The $9.4 billion has not yet been fully realised. In FY2023, Keppel recognised a disposal gain of approximately $3.3 billion from combining Keppel O&M and Sembcorp Marineto form Seatrium. The other part of the $9.4 billion will likely be via the vendor notes issued to Keppel from the sale of the legacy rigs to an “Asset Co”, for which Keppel will be repaid over time and the out-of-scope assets.

Loh announced a three-year monetisation target of $3 billion to $5 billion. In FY2023, $950 million was monetised. “Our asset monetisation has slowed. Because quite a number of the assets we have on the list are real estate assets. We are still looking at $10 billion to $12 billion, cumulatively by 2026,” Loh says. Since 2020, Keppel has announced it will monetise $5.4 billion of assets. 

The slow monetisation in FY2023 is evident in the company’s cash flow statement. While operating cash flow remained positive, free cash flow stayed negative for the second consecutive year, with a free cash outflow of $384 million in FY2023.

“We expect the pace of asset monetisation to gain traction in 2024, potentially returning to its three-year average annual run rate of $1.4 billion (FY2023: $947 million) if market conditions improve, following the tough deal-making environment seen in 2023,” CGS-CIMB observes. 

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CGS-CIMB reckons that prolonged weakness in China’s real estate sector could prompt Keppel to divest larger portions of its $1.1 billion China landbank recorded at historical cost in 2024 and redeploy capital into sustainable energy solutions and FUM acceleration. 

Elsewhere, the sale of its legacy rigs in Asset Co is still on the cards, and the latter is receiving active enquiries for these assets, which could prompt quicker redemption of its $4.3 billion of vendor notes over 2024–2025, CGS-CIMB suggests. 

Despite the slower monetisation rate, Keppel rewarded its shareholders with $2.70 in dividends, including dividends-in-specie. These included $2.19 in value from Sembcorp Marine shares, 15 cents in interim dividend, 16.7 cents worth of Keppel REIT shares and 19 cents in cash from a final dividend. 

“The market and our investors have recognised our transformation efforts. Against the challenging landscape, we achieved Total Shareholder Returns (TSR) of 49.3% for 2022 and 61.1% for 2023, far exceeding the TSR of the STI in both years,” Loh adds. 

Scaling FUM 

“Keppel is confident its acquisition of Aermont Capital [will enable it] to enter the European market and grow the asset management business, and thus mitigate China’s real estate slowdown,” notes CLSA in an update after Keppel’s results. 

Keppel achieved closings of US$575 million ($772 million) for the Keppel Core Infrastructure Fund and RMB1.6 billion ($298 million) for the China-focused Sustainable Urban Renewal (SUR) programme. It also obtained full ownership of Keppel Credit Fund Management, formerly Pierfront Capital, with the acquisition of the remaining 50% stake. 

As of the end of December 2023, Keppel’s FUMs grew to $55 billion from $50 billion a year ago. When phase 1 of Aermont Capital is completed in 1H2024, Keppel’s FUM is expected to grow to about $79 billion. While Keppel has a $200 billion FUM target by 2028, it has set an interim target of $100 billion by 2026. 

During the Q&A on Feb 1, concerns about China were raised. “The truth is the market is a bit stressed right now. So cap rates may have expanded, but in terms of our capabilities, because Keppel is unique in coming up with SUR solutions, we can improve the leasing, the net operating income of the assets, and that in turn rebalances it,” says Christina Tan, CEO, fund management and Keppel’s chief investment officer. She adds that most of Keppel’s China SUR programme investors are outside China.  

It was in a reply by Cindy Lim, Keppel’s CEO of infrastructure, to a question that spurred The Edge Singapore’s interest in Keppel. She explained that Keppel is expanding its generation capacity. “We are the first to market in planting a 600MW hydrogen-ready combined cycle gas turbine power plant,” Lim says. She adds that this is based on Keppel’s existing generation capacity. 

“We are constantly improving our margins, not just on the back of better electricity spreads but in energy efficiency and generation capacity,” she adds. 

Secondly, Keppel stands ready to capture low carbon-energy demand in Singapore and the region. “This is where you see us also pushing ahead in developing the power interconnect for the low-carbon electricity trade in Asean. We are working hard to push the development of such an Asean power grid, which will benefit Keppel, Singapore and the region,” adds Lim. 

How these plans emerge, with undersea cables to carry low carbon energy from one place to the other, could provide Keppel with new building and operating projects, including data centres. The offtake vehicles for these long-dated operating assets will likely be Keppel DC REIT and Keppel Infrastructure Trust

“We have pursued diligently, in the past few quarters, new geographies where we see a fundamental growth in the demand for sustainability solutions. We have decisively shifted away from EPC projects to enhance the resilience and quality of the earnings. So, the lumpiness and the type of feast-or-famine earnings profile is behind us,” offers Lim. 

Look beyond financials

Loh is hoping that investors look beyond its financial numbers. “Profits are important, but it is how the market values our profits. So, we are hopeful that as earnings become more recurring and we become more growth-oriented, analysts will start looking at applying a growth multiple to our earnings. The growth will come in various forms, from profit growth, but I think what is more important is the type of earnings we have and the quality of the earnings. And the type of earnings that are recurring will hopefully allow the market to apply a growth multiple rather than looking at the traditional way, where you look at price-to-book, discount-to-RNAV.” Keppel’s FY2023 NAV of $5.85 was down 8.3% y-o-y, and its net tangible asset of $4.98 was 9.3% lower.

Loh may have some convincing to do. CGS-CIMB has an “add” rating for Keppel but cautions that the reclassification of Asset Co from operating assets to debt instruments may result in deferred losses of $1.2 billion to be amortised on a straight-line basis over seven years from FY2023, translating into $178 million in depreciation a year.

CLSA has kept its “underperform” recommendation, pointing out that elevated electricity prices allowed infrastructure to support earnings. At any rate, both CGS-CIMB and CLSA have lifted target prices as Keppel heads for a better year in 2024. CGS-CIMB, which points out that the Bloomberg consensus is nine “buys”, one “hold”, and one “sell”, has a target of $8.98 for the stock.  

 

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