Keppel Corporation Recent Drop - Unfounded or Valid Concerns?

Hey all, just wanted to provide my perspective on a recent update of my absolute biggest holding, Keppel Corp (SGX: BN4). If you're anything like me, then you're checking the stock market on a regular basis, hell, perhaps even daily. Now, imagine my surprise when upon opening the SGX tab last Friday, when I was greeted with the scene of Keppel Corp being the top loser, dropping a whopping 5% from 7.65 to 7.27 in a single day. Suffice to say, my portfolio wasn't exactly a pretty sight. Obviously, there's a reason for this; Keppel's earnings report.

If you've been hanging out at the right places, then you'll be aware that many were expecting Keppel to release stellar earnings accompanied by a fat dividend. Alas, reality usually doesn't pan out the way we want it to. In FY2021 H2, Keppel declared a dividend of 0.21 SGD per security, whereas fast forward to today, that same half's dividend dropped to 0.18 SGD per security. I'm quite sure that the recent price correction can be attributed to the fact that the initial price rise came about from higher and higher expectations. 

So, let's take a look at Keppel Corporation's recent earnings report, and see if fundamentals are indeed deteriorating. 

Snippet of Keppel Corp's recent annual results document

Revenue remained virtually unchanged, hovering at around 6.6 billion SGD, whereas operating profit dropped from 1129 million SGD in FY2021 to 565 FY2022, what gives?

 

Materials and staff costs remained roughly constant, whereas Depreciation decreased rather substantially by 29%. Additionally, the expected credit loss also decreased considerably by around 88.6%! By all accounts, one would have expected Keppel to outperform FY2021 due to lower costs. Upon reading further, would one then find the reason for the large discrepancy between FY2021 and FY2022 performance; The "other" operating income section. From $855,476,000 in FY2021 to only $28,343,000 in FY2022. Safe to say, this is probably the reason, but what does it mean? Well, it simply means Keppel received fewer gains from the divestment of assets, which it had done a lot of in FY2021. Hence, the drop in EPS and dividend is rather in line with my expectations. 

When reviewing segment performance, it is no surprise that all four segments: Asset Management, Urban Development, Energy & Environment and Connectivity have all turned a profit. Although Keppel Offshore & Marine, soon to be divested, turned a profit instead of a loss this year, I still find the sale of the division rather desirable. Even with rising oil prices, I believe that the long-term trend of clean/nuclear energy overtaking oil, coupled with the weakening stranglehold OPEC has on oil prices due to members "backstabbing" each other, will result in decreasing margins, assuming oil is profitable for that year in the first place. 

Asset Management, which has been the largest net profit contributor by far, has done relatively well, increasing by around 3% YoY, attributed to higher management fees from new acquisitions and funds raised by its subsidiaries and increased Asset Under Management (AUM). I find Keppel's goal of reaching $200 Billion AUM moving forward to be rather ambitious.

Energy and Environment net profit approximately doubled YoY to $241 million, with a high emphasis on renewable energy. I suspect that this profit may taper off moving forward as I see electricity prices not being able to sustain their current level in the foreseeable future. That being said, I find that Keppel will indeed be able to achieve its goal of 7 GW of renewable energy assets from its current 2.6 GW and that renewable energy will continue to be a valuable segment of Keppel's portfolio in the future. I hope that Keppel continues to invest in utility assets since I am of the view that it will contribute immensely to recurring income. 

For Keppel's connectivity segment, I have nothing much to say. I must admit that the segment's performance has been rather commendable, with M1's contributions to earnings rising by 32% YoY to $75 million and having almost 95% coverage for 5G technology already set in place. However, I must say that I don't really like the telecommunication industry and do not find it worth venturing into, given its high level of competition and consequently cutthroat, slim margins. On the flip side, I find that Keppel DC REIT is an invaluable asset to Keppel since it is rather defensive. No matter what, digital storage will be needed in the future, and companies will continue to use data centers for two reasons: Firstly, the cost of a company setting up its own data center is simply too much to be worth it. Secondly, it is extremely troublesome for companies to switch data centers. This gives Keppel DC Reit a high potential for positive rental reversions and strong occupancy. 

Lastly, we have the Urban Development segment, which is probably my least favourite segment. I subscribe to Keppel's 2030 Vision, emphasising an asset-light model and recurring income - Urban Development is none of that. It performed poorly this year attributed to the China COVID lockdown, resulting in lower en-bloc sale gains. I foresee the segment to remain stagnant despite the lifting of the China lockdown, as I feel that the China property market has become oversaturated, resulting in large headwinds for the division.

In terms of Keppel's overall performance, I am delighted to see that recurring income has doubled to $560 million. Whether this trend will continue is up for discussion, as I admit that I do not have sufficient accounting knowledge to properly assess and project Keppel's future performance. Notwithstanding this, I do believe that Keppel will continue and grow as an economic powerhouse in the future, and have strong convictions in its 2030 Vision. 

Brief Overview of Keppel Corp's Share Valuation

As per updated SGX calculations, this is the current valuation of Keppel Corp Shares:

Price/Book of 1.098

Price/Earnings of 14.038

Dividend Yield of 4.545%

Personally, I find that the market has commensurately punished Keppel Corp's shares due to its latest earnings report. I find that the recent share price climb was simply based on high expectations which may have deviated from reality. However, I still feel that Keppel has a high upside going forward, and am looking forward to my potential dividend in species of Sembcorp Marine Shares. Should Keppel drop below $7, I will do everything in my power to further accumulate. I must add that it seems like analysts have also shared my view, with Keppel earnings being 101% of their earnings forecasted. 

To answer the question in the title: No, Keppel's fundamentals have not deteriorated in my opinion!

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Disclaimer: Please take everything published within this blog with a pinch of salt. Nothing I say here should be misconstrued as any form of financial advice whatsoever. In fact, I am probably the absolute last person you should approach for any sort of advice. All self-computed figures are calculated to the best of my ability, but I cannot guarantee they are 100% accurate.

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