Keppel Corporation 1H22 - UOB Kay Hian 2022-07-29: Solid Contribution From All Businesses Despite Some Headwinds

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation 1H22 - Solid Contribution From All Businesses Despite Some Headwinds

Keppel Corp reported net profit from continuing operations of S$434m, up 26% y-o-y and better than expectations due to strong contributions from the infrastructure and asset management businesses.

We remain cautiously optimistic that its China property business would turn around in the medium term. Keppel Corp declared an interim dividend of S$0.15 which was higher than expected.

Keppel Corporation (SGX:BN4) reported 1H22 revenue from continuing operations of S$3.4b (+16.2% y-o-y), which resulted in a 26% y-o-y increase in net profit from continuing operations of S$434m.
Note that these results exclude Keppel Offshore Marine (KOM) due to its proposed combination with Sembcorp Marine (SGX:S51), targeted for completion in 4Q22. Including KOM, Keppel Corp’s net profit would have exceeded our estimates.
The company declared a better-than-expected dividend of S$0.15 per share which represents a payout ratio of 62%, and higher than its historical payout ratio of 39-59% in the past 10 years.

From a reasonably small business unit a few years ago, Keppel Capital is now a meaningful contributor to Keppel Corp’s bottom line, generating S$155m (+32% y-o-y) or 36% of the company’s net profit from continuing operations in 1H22.
The asset management (AM) business saw higher fee income from successful acquisitions by its REITs and trusts and also benefited from higher fair value gains on investment properties and data centres.
On the analyst call, management commented that it expects further growth in funds under management given that investors have increasingly sold bonds in favour of exposure to alternative assets.

As at end-1H22, KOM had S$4.4b in net orderbook with a further S$8b worth of potential contracts in advanced discussions. Importantly, the company managed to garner S$255m worth of bareboat charters for four of its legacy rig assets (which are not going into the Sembcorp Marine merger).
Management appeared confident that it would be able to sell its other rigs sooner rather than later given the more bullish offshore marine environment.

The lowlight for 1H22 was Keppel Corp’s urban development business with its China segment facing major headwinds as a result of the country’s property developers facing a major deleveraging process coupled with the “zero-COVID” strategy which has wreaked havoc on the economy. As a result, the country’s big developers have experienced > 50% y-o-y decline in units sold while Keppel Corp saw a 69% y-o-y decline in 1H22 (refer to the bar chart in report attached below). This has been somewhat offset by prices which have held up well given government policy support.
However, we note that more recent data in June appears to show a nascent recovery, especially in areas where Keppel Corp has interests. Keppel Corp management revealed that as part of its financial reporting process, it had reviewed its projects under development and concluded that there is currently no need for any impairments across.
We remain cautiously confident that China and its property market will turn around in the next 6-9 months.

Since Keppel Corp announced its asset monetisation plans in Oct 20, it has completed S$3.6b worth of deals. In the past few months, the pace appears to have slowed down, although the management remains confident that it is on track to exceed its S$5b target by end-23.

Our earnings forecast for Keppel Corp changes reflect the elimination of KOM from our forecasts. Continue to read the PDF report attached below for details. Given the relatively more complex nature of the transaction with Sembcorp Marine, it may take time for the value of the merger to be surprise.
See
Keppel Corp has spent S$364m (or 73%) of its current S$500m share buyback programme which was launched in Jan 22. Keppel Corp disclosed that it will use these shares either as partial payment for future acquisitions or as performance rewards for its staff.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-07-29

SGX Stock Analyst Report BUY MAINTAIN BUY 10.110 SAME 10.110