<Results Analysis> 1H23 results a mixed bag
- 1H23 net profit in line with our estimate (8% below consensus); benign earnings from asset management and property development offset by higher electricity profits
- Look forward to better 2H with potential conclusion of asset management deals and divestment
- DPS of 15 Scts in 1H23; surprise special dividend-in-specie of KREIT shares (~18Scts/KEP share)
- Room to re-rate further after rising 19% since our reinstatement of coverage; Reiterate BUY and TP S$8.30
Introduction of new segmental and horizontal reporting. As guided during Transformation Strategy briefing in May-2023, Keppel has changed its segmental reporting from 1H23 to reflect its horizontally integrated operating model and recurring income growth, particularly from fee-based asset management (Please refer to table below for details).
A mixed bag of results. Excluding disposal gains of S$3.18bn from yard merger, 1H23 core profit of S$445m (+3% y-o-y; +10% h-o-h) was broadly in line, making up c.48% of our 8% below consensus FY23F estimate. The star performer was Integrated Power Operations, which benefited from higher tariff in Singapore, offsetting the weaker than expected recovery of property profits and decline in asset management income as well as revaluation gains. Keppel still holds 1.85bn shares or c.2.7% stake in STM to encash.
Infrastructure earnings doubled y-o-y to S$291m in 1H23, thanks to Integrated Power Operations, which contributed S$245m or c.84%/55% of Infrastructure / Group profits. Management stressed that over 99% of customers are locked in on fixed or indexed electricity price plans, providing a cushion against power price fluctuations, and resiliency to new measures on Temporary Price Cap for the spot market. Given the tight power market in Singapore with no new capacity till 2026, we believe power earnings will likely stay elevated in the coming 2-3 years.
Keppel now has ~3.0GW renewable energy portfolio. Of which 65% is solar, 32% wind and 3% hydro.
Real Estate in China remains challenging, though there are some pockets of opportunities. 1H23 net profit from this division dropped 29% y-o-y and 8% h-o-h to S$186m due to lower revaluation gains and operating income. While development profits grew 29% y-o-y to S$142m, recovery pace seems slower than expected. 1Q23 surge in China home sales proved to be short-lived, as sentiment took a sharp turn in 2Q23. With the government’s recent stance to support the property market, we are hopeful of sequential improvement in 2H. Demand in tier 1 & 2 cities remain supportive though project progress is lagging. While market conditions are less than ideal and uncertain, Keppel remains cautiously optimistic and continues to actively look for divestment opportunities. It has successfully sold two plots of land at Tianjin Eco-city, one of which recognized S$14m profit in 1H23.
Connectivity earnings was steady, up 12% y-o-y to S$37m, attributable to higher M1 income. This was partially offset by lower contributions from Data Centres and Networks Division due to startup cost entering new markets and initiatives.
Keppel introduced FUM (Funds under Management) of S$53.2bn (+6% y-o-y). Keppel also introduced its Fund under Management (FUM), which is fee-bearing, to replace AUM previously. AUM has S$12.5bn of assets on Keppel’s balance sheet that can be potentially converted into future FUM.
Net gearing increased slightly to 0.86x, from 0.78x as of end 2022. Book value declined marginally following the dividend in specie of STM shares, which was largely offset by disposal gains recognised.
Recurring income grew 62% y-o-y to S$340m in 1H23, making up 76% of group profit, improving earnings quality and stability. With steady power earnings contributing to c.70% of recurring income, which could be sustainable, lending support to dividend payout.
Stable interim dividend. Keppel declared an interim dividend of 15 Scts (comparable to last year), translating to 2.2% dividend yield (annualized 4.4%). Payout ratio is slightly higher than expected at 59%, vs guidance of ~50-55%.
Special dividend of KREIT shares. Pending EGM approval, Keppel shareholders will receive 1 KREIT share for every 5 Keppel shares held as special dividend in conjunction with Keppel’s 55th year anniversary. Based on the last close of S$0.92, the special dividend is worth c.18Scts / Keppel share. Keppel’s stake in KREIT will be reduced from c.47% to 37%.
1H23 Net Profit (Horizontal Reporting)
| Segment (S$ m) | Asset Mgmt Income | Operating Income | Valuation Items | EPC/ Development | Capital Recycling | Net Profit |
| Infrastructure | 4 | 303 | -2 | -14 | 0 | 291 |
| yoy chg | -79% | 183% | 100% | -200% | nm | 109% |
| hoh chg | -69% | 33% | -75% | -60% | -100% | 84% |
| Real Estate | 20 | -28 | 31 | 142 | 21 | 186 |
| yoy chg | 54% | -190% | -71% | 29% | nm | -29% |
| hoh chg | -29% | 0% | -74% | 112% | 31% | -8% |
| Connectivity | 6 | 35 | -7 | 0 | 3 | 37 |
| yoy chg | 0% | 3% | -30% | nm | 0% | 12% |
| hoh chg | -50% | -13% | -141% | nm | -175% | -43% |
| Corporate Activities | -69 | |||||
| yoy chg | nm | |||||
| hoh chg | 245% | |||||
| Net Profit | 30 | 310 | 22 | 128 | 24 | 445 |
| yoy chg | -21% | 80% | -77% | 3% | 700% | 3% |
| hoh chg | -43% | 29% | -83% | 300% | -186% | 10% |
| Asset Mgmt Income | Operating Income | Valuation Items | EPC/ Development | Capital Recycling |
| Mgmt feesPerformance feesTransaction fees (acq & divestment) | Sale of gas, utilities & electricityLeasing incomeO&MFacility & Property mgmt.Investment income | Property revaluationMTM gains/loss | EPCDevelopment profits | Disposal gains/lossGains from en-bloc sales |
Source of all data: Company, DBS Bank