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DBS reinstates coverage on Keppel Corp, the 'undervalued gem'

The Edge Singapore
Updated ·2-min read

Ho believes Keppel Corp's P/B valuation relative to CLI should improve

DBS Group Research has reinstated coverage on Keppel Corp with a "buy" call and bullish target price of $8.30, up some 40% from current levels.

"Keppel Corp offers investors a unique and unrivalled proposition as a global asset manager with developer and operator capabilities in real estate and green industrial space," writes analyst Ho Pei Hwa in her April; 16 note.

"We believe that Keppel’s strong engineering/construction roots and track record in capital management positions in its emergence and growth as a global asset manager," she adds, calling the stock an "undervalued gem".

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Ho projects Keppel's earnings to grow at a CAGR of 12% over the next two years, led by its asset management business which generates a steady, recurring stream of fee income.

As at end of 2022, the company has an AUM of around $50 billion and aims to grow this base to $200 billion by 2030.

In addition, with the pandemic largely over, Keppel's property and land sales in China and Vietnam is set to recover.

The way Ho sees it, Keppel's earnings quality has improved "dramatically", with recurring income now at around 40%, up from 25% previously, before the company embarked on its new strategy.

"The trend shall continue with concerted effort to pivot away from orderbook revenue to income from fees and from its portfolio assets, such as real estate, infrastructure and digital assets," adds Ho.

For now, its ROE is around 9%, which falls short relative to its 15% target.

"We look forward to AUM growth and turnaround of property business to drive returns towards its target in the medium term," notes Ho.

Her $8.30 target price, derived using a sum of the parts methodology, is based on 18x FY23 asset management earnings; a 40% discount to the RNAV of its property business, and 9x earnings of its infrastructure and connectivity business segment.

Keppel is now trading at just below its book value, while CapitaLand Investments, with a somewhat similar business of building a business via an asset management platform, can fetch 1.3x.

Ho believes that this "unwarranted" gap, despite "superior ROE and dividend yield as well as similar growth, will likely narrow."

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