CGS-CIMB retains ‘buy’ on Keppel Corporation, citing strong recovery in multiple sectors

Douglas Toh
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CGS-CIMB Research has retained “buy” on Keppel Corporation (KEP) with an unchanged target price of $8.70.

CGS-CIMB Research analyst Lim Siew Khee has retained “buy” on Keppel Corporation (KEP) BN4 with an unchanged target price of $8.70, as data has shown core net profit excluding KOM to rise 9% y-o-y and 17% h-o-h to about $474 million in 1HFY2023 ended June, led by stronger recovery in urban development and infrastructure.

The analyst notes that her July 21 report is based on the previous reporting format of four segments, which will be changed by KEP to a format of three business segments, namely infrastructure, real estate and connectivity in its 1HFY2023 report.

Lim projects urban development to post core net profits of around $171 million in 1HFY2023, an increase of 2% y-o-y and 50% h-o-h on stronger recognition of Keppel Land’s trading projects in China.

Furthermore, home sales in 1QFY2023 were strong in China (830 units) but could be soft in the following quarter due to muted post-pandemic economic recovery.

In addressing KEP’s other real estate projects elsewhere, Lim is optimistic.

“We expect some gain from the monetisation of three real estate projects worth $278 million in the Philippines, Myanmar and Vietnam that took place in 1QFY2023. The Sino-Singapore Tianjin Eco city (SSTEC) sold two plots of land in 2QFY2023 worth RMB 1 billion ($185 million), where KEP’s stake is 50%, after a quiet year in FY2022,” says the analyst.

Gains are expected from the sale of plot 35 in April this year, which will be recognised in 1HFY2023 whilst the sale of plot 18b-2 in June will be recognised in 3QFY2023.

Meanwhile, Lim expects infrastructure to post a core net profit of around $104 million, an increase of 125% y-o-y and decrease of 18% h-o-h in 1HFY2023 on the back of strong power spread in Singapore as contracts are locked in for one to three years for Keppel Electric.

In the group’s 1QFY2023 business update, Keppel Infrastructure’s revenue was up 4% y-o-y to $1.03 billion showing a strong y-o-y improvement in net profit, which the analyst attributes to power spread.

Almost all of Keppel Electric’s are contracted for one to three years, with 1% of its customers on spot price contracts.

The analyst estimates that the group’s 10% investment in MET Group “should keep reaping strong returns”. MET Group’s FY2022 revenue of EUR 41.5 billion ($60 billion) led to a share of profits from associates spiking over 600% to $107 million in 2HFY2022.

According to Lim, KEP’s interim DPS of 15 cents should sustain as asset monetisation momentum picks up in 2HFY2023.

KEP has monetised around $400 million of assets ytd, against FY2021 to FY2022’s average of $1.5 billion.

“Based on its cumulative target monetisation plan starting 2020 of $10 billion to $12 billion by 2026, or a total of $5 billion to $7 billion for 2024 to 2026, we think KEP needs to keep up the monetisation pace of $1.7 billion p.a. ,” opines Lim.

The analyst adds that downside risks facing KEM include slower asset monetisation and a sharp decline in recurring income from a sudden change in business environment.

As at 2.30pm, units in KEM are trading 9 cents up or 1.31% up at $6.98.

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