1H23F preview: stronger excluding KOM
- Excluding KOM, we expect core net profit to rise 9% yoy and 17% hoh to c.$474m in 1H23, led by stronger recovery in urban development and infra.
- Infrastructure to drive profit in 1H23F on sustained high power prices. Urban development should see a pick-up in trading projects and land sale in China.
- Disclosure format will change in 1H23 results with more focus on fund management, investment and recurring operating income.
- We retain our Add call with an SOP-based TP of S$8.70. Accelerated pace of asset monetisation is key catalyst to either fund DPS or future growth.
1H23F earnings on 27 Jul 2023
We expect KEP’s core net profit to rise 9% yoy and 17% hoh to c.$474m in 1H23. For this preview, our commentary will be based on previous reporting format of four segments. In its 1H23F reporting, KEP will change the organisation structure and reporting format into 3 business segments – infrastructure, real estate and connectivity.
Urban development: pick up in land sale and activities in China
We expect urban development to post core net profit of c.S$171m (+2% yoy, +50% hoh) in 1H23F on stronger recognition in Keppel Land’s trading projects in China. Home sales in 1Q23 (830 units) were strong in China but may be soft in 2Q23 on muted post-pandemic economic recovery. We expect some gain from the monetisation of 3 real estate projects worth S$278m in the Philippines, Myanmar and Vietnam that took place in 1Q23. SSTEC sold 2 plots of land in 2Q23 worth Rmb1bn (KEP’s stake 50%) after a quiet year in 2022 (Fig 2). We expect gains from sale of plot 35 in Apr 23 to be recognised in 1H23 while the sale of plot 18b-2 in Jun 23 will be recognised in 3Q23F.
Infrastructure: sustained strength in power market
We expect infrastructure to post core net profit of c.S$104m (+125% yoy, -18% hoh) in 1H23F on the back of strong power spread in Singapore as contracts are locked in for 1-3 years for Keppel Electric. In 1Q23 business update, Keppel Infrastructure revenue up 4% yoy to S$1.03bn with strong yoy improvement in net profit which we think may be due to power spread. Almost all of Keppel Electric’s are contracted for 1-3 years with 1% of its customers on spot price contracts. Its 10% investment in MET Group should keep reaping strong returns, in our view. MET Group FY22 revenue was €41.5bn (FY21: €18.1bn) which led to share of profit from associates spiking >600% to S$107m in 2H22.
Retain Add and TP of S$8.70; asset monetisation needs to pick up
We believe interim DPS of S$0.15 should sustain while we wait for asset monetisation momentum to pick up in 2H23F. KEP has monetised c.S$400m of assets YTD vs. FY21- 22 average of S$1.5bn. Based on its cumulative target monetisation plan of S$10bn-12bn by 2026 (since 2020) or a total of S$5bn-7bn for 2024-26, we think KEP needs to keep up monetisation pace of S$1.7bn p.a. Downside risks: slower asset monetisation and sharp decline in recurring income from a sudden change in business environment.
Connectivity steady, asset management weaker
We expect connectivity to post net profit of S$28m in 1H23F (+188% yoy, flat qoq) due to steady mobile and enterprise business expansion. Slower pace of M&A activities in 1H23 should see weaker performance fees for Keppel Capital. In the new disclosure format, asset management will be subsumed into the three business segments, i.e. the share of profits of REITS will be reorganised into real estate (K-REIT and KORE), infrastructure (KIT) and connectivity (KDC REIT).