55th anniversary surprise dividend in specie
- We were positively surprised by the 55th anniversary DIS of S$0.184 K-REIT shares per KEP share. Including interim DPS of S$0.15, 1H23 yield at 4.8%.
- KEP’s 1H23 net profit of S$445m is broadly in line with our S$474m forecast, forming 45% of our FY23F. We expect a stronger 2H23F on more deals.
- We give credit to the infrastructure segment as net profit rose 109% yoy to S$291m, lifted by strong integrated power and recurring income.
- Key catalysts: accelerated capital recycling activities to fund DPS or future growth. Reiterate Add and SOP-based TP of S$8.70.
Total dividend: S$0.334
KEP’s 1H23 net profit of S$445m was broadly in line with our S$474m forecast, forming 45% of our FY23F. The key surprise was the special Dividend In Specie (DIS) of c.352.4m units in KREIT (Add, TP: S$1.14) held by KEP, or c.9.4% of the total issued and paid-up units in KREIT to KEP’s shareholders, based on 1 KREIT unit for every 5 KEP shares held. This works out to be S$0.183 per KEP shares. Post the DIS, KEP’s stake in KREIT will be reduced to c.37.1%. This is subject to shareholders’ approval at an EGM (date to be announced). In addition, KEP said it will pay a cash interim DPS of S$0.15.
Infrastructure base of recurring income
Infrastructure’s 1H23 net profit grew by 109% yoy to S$291m, thanks to stronger margins and net profit of S$245m (1H22: S$34m) from integrated power operations in Singapore. Power contracts are locked in for 1-2 years from 2023 which could sustain the recurring income base, in our view. Infrastructure also has a backlog of S$4.1bn in long-term contracts, comprising S$2.1bn of Energy as a Service (EaaS) and S$2bn of operations and maintenance contracts. Profit contribution from EaaS was not disclosed but the contracts momentum has been strong with YTD wins of S$1.2bn in Singapore, Vietnam, and Thailand. We believe earnings could be more material from FY24F onwards.
More deals ahead
KEP has monetised c.S$420m of assets YTD (similar period in 2022: S$710m, 2022 total: c.S$1.5bn). We expect asset monetisation to pick up in 2H23F, including data centres such as Almere Data Centre 2 in Netherlands and Genting Lane (KDC SGP 7). We understand the first two buildings of KDC SGP 7 (GFA of c.185.5k sq ft) have been fully committed with tenants gradually moved into the first, while the second building is still under construction. KEP is pursuing c.S$13bn of deals which could be converted to funds under management (FUM) in 2H23F as asset prices may become more attractive, increasing illiquidity. 1H23 FUM stood at S$53.2bn – Real Estate (62%), Infrastructure (22%) and Connectivity (16%). It maintains an FUM target of S$100bn by 2026F.
Reiterate Add and TP of S$8.70 as the group sharpens focus
We think KEP is advancing to become a global alternative real asset manager. Downside risks: weak macro that weakens fund performance and slows the pace of capital recycling.