Raising the bar
? We are pleasantly surprised by the generous S$0.21 final DPS announced by KEP, bringing total DPS to S$0.33 (vs. our S$0.28), or 6% yield.
? KEP also announced S$500m worth of shares in a share buyback program, reflecting management’s positive response to its deep discount valuations.
? KEP trades at 0.86x CY22F P/BV with a c.5% dividend yield, 11x CY22F P/E, -1 s.d. of its historical average. Maintain Add and S$7.20 TP.
? Catalysts: expansion into renewables, consistent S$2bn-3bn of asset monetisation p.a. and accretive M&As.
Generous dividend and share buyback
KEP surprised us positively with the S$0.21 final DPS, thanks to the S$2.9bn asset monetised and S$2.7bn cash collected since Oct 2020. This brings total DPS to S$0.33, the highest since 2016. Despite the S$318m impairment made in 1H21 for KrisEnergy, dividend was ringfenced and represented 45% payout (ex-impairment), in line with historical trend of 48%. In addition, it also announced the committed S$500m share buyback (up to 2% of its issued shares). KEP says that the program will be held as treasury
shares for employee share plans as well as possible currency for future M&As, to align interests with founders of target acquisitions. The buyback program could start immediately and could take more than a year to complete. This is the first time KEP has committed an amount on a buyback program, reflecting management’s response to the discounted valuations, in our view .
New energy strategy pays off
2H21 net profit of S$723m (141% hoh) beat our S$459m expectations; FY21 net profit reached S$1.023bn (FY20: loss of S$506m). This is largely due to S$315m FV gain on investments which includes S$277m fair-value gains in electric vehicle battery business (Envision AESC). This is the fruit of KepVenture’s US$50m investment for a minority stake in the intelligent lithium-ion battery business in 2019. KEP is making progress in its renewables portfolio, reaching 1.1GW capacity after co-investing in a 51% stake in Cleantech Renewable Assets (adding 600MW total capacity in India & Southeast Asia).
Consistent asset monetisation
Net gearing stood at 0.63x. With the SPH acquisition likely to be off, we expect KEP’s M&As to focus on renewable and clean energy, decarbonisation, sustainable urban renewal and connectivity in the near term. With S$2.9bn capital unlocked since Oct 2020, w e believe KEP could continue with the momentum of asset monetisation plans of S$2bn3bn p.a., and is likely to exceed its S$5bn target by end-2023.
Maintain Add and SOP-based TP of S$7.20
Catalyst for share price outperformance is a faster-than-projected pace of asset recycling. Proposed merger with SMM should conclude by 1Q22. Downside risks include slower than-expected macro outlook, and unfavourable outcome of SMM merger.