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UOB Kay Hian maintains 'buy' call for Keppel with $10.11 TP with infrastructure investments set to drive growth

Bryan Wu
Bryan Wu9/12/2022 12:08 PM GMT+08  • 3 min read
UOB Kay Hian maintains 'buy' call for Keppel with $10.11 TP with infrastructure investments set to drive growth
Keppel Infrastructure Trust's key acquisitions this year included $900 million in European wind power. Photo: Keppel Corpuo
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UOB Kay Hian analyst Adrian Loh has maintained his “buy” call for Keppel Corp with a target price (TP) of $10.11, representing a 36% upside.

In his report dated Sept 12, Loh says that Keppel and its subsidiaries’ expenditure of over $3.2 billion on stakes in infrastructure has put in place the “foundations for the next stage of growth” after the company’s planned divestment of its offshore marine unit, which is expected in 4QFY2022.

According to him, the company appears to be at an “interesting crossroads” in 2022, with the exit of its offshore marine segment and moving towards a more asset-light and recurring earnings business model, as well as towards its 15% return on equity (ROE) target compared to the ROE of 9.1% in 2021 and the 1HFY2022 annualised ROE of 8.4%.

Loh believes that there will be interest around the pace of its asset monetisation, which could bolster earnings again in 2022 and thus lead to another dividend surprise.

He points out that Keppel’s share price has been well-supported by its share buyback programme, with the stock near the end of its current $500 million share buyback mandate, having already spent $492 million to buy back 74.8 million shares at an average purchase price of $6.58 per share or 4.2% of its outstanding shares.

“Thus far in 2022, Keppel has announced a slew of initiatives and acquisitions that, in our view, are intended to set the stage for the company’s next stage of growth,” writes the analyst.

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He highlights that all of Keppel’s growth capex to date has been in the infrastructure segment. “In our view, this is understandable given that its offshore and marine segment is in the process of being divested and activity in its key business segment of China real estate has been on enforced hiatus given the country’s ‘zero-Covid’ strategy,” Loh says.

“In our view, the key acquisitions year-to-date (ytd) were the onshore and offshore wind power acquisitions in Europe and the waste management business in South Korea, where Keppel’s 18%-owned subsidiary Keppel Infrastructure Trust (KIT) has taken key positions in,” he adds.

The way Loh sees it, KIT remains a “key growth engine” for Keppel, with over $6.1 billion in assets under management across 12 businesses and concession assets, underpinned by strong secular trends.

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He believes that KIT as a business trust appears to have strong distribution per unit (DPU) growth momentum over the next two to three years and notes that KIT’s 1HFY2022 results were strong with, a 2.7% year-on year (y-o-y) DPU growth and 10% y-o-y ebitda increase.

One of KIT’s key acquisitions this year was a $900 million wind power acquisition in Europe. “With its cashflow visibility and 28 years of economic life, these assets appear to be very timely given the electricity travails that the region is suffering from as a result of the Russian-Ukraine war,” says Loh.

His share price catalysts include continued growth in Keppel’s asset management business, property market recovery in China and earnings accretive investments in its infrastructure segment.

As at 11.42, shares in Keppel Corp were trading 2 cents or 0.27% up at $7.42.

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