Keppel FY23 Results! Keppel Valuation & Performance Review

Introduction

Keppel Limited (SGX: BN4) is a stock ticker I hold dearly to me. I went all in on the counter just around the time when the Seatrium spin-off was announced and I must say it's been an extremely rewarding journey. I've been looking forward to whatever updates the conglomerate has provided and since it's been a while since the last time I took a look at Keppel, I wanted to see if it's still a BUY. 

In this brief article, I'll cover Keppel's FY23 Financial Performance and how it holds up against previous years, Balance Sheet health, and find an approximate fair intrinsic value of Keppel. 

Keppel Limited's Logo (Source: Keppel Youtube)

Overview of FY23

Keppel FY23 Financial Results (Source: Keppel FY23 Investor Presentation Slides)

To sum it up:

- Keppel Corp's 2H23 Dividend increased by 5.5% to $0.19 as opposed to last year's $0.18

- 2H23 Net Profit from continuing operations was $440 million, 9% higher YoY.

- Excluding discontinued operations and DIS loss, ROE improved to 9.3% in FY23 from 7.3% in FY22. 

- 54% Growth in recurring income YoY, with 88% of FY23 net profit from continuing operations being recurring in nature from 60% in FY22.

Overall, it's been a rather rewarding fiscal year for Keppel shareholders. However, it's important to note that although Keppel's net profit from continuing operations has increased, not all business segments have experienced a corresponding increase. 

Net profit attributed to the Real Estate segment decreased to $426 million in FY23 from FY22's $464 million, thanks to the extensive leveraging and quick successive deleveraging in the China Real Estate space. I believe the problem China's economy is facing is a deep-rooted structural one, and consequently would take at least a few years for the global superpower to sort itself out. 

Keppel's Infrastructure Segment FY23 vs FY22 Performance (Source: Keppel FY23 Investor Presentation Slides)

Keppel's Infrastructure Business Segment stood out with a 135% YoY increase in net profit. Given that this huge increase is mainly attributed to Asset Management fees and Operating Income, both recurring in nature, I believe we can continue to see a similarly high performance for the segment in the near future. It's also interesting to note that Keppel has managed to increase the gross margin for its Infrastructure & Connectivity arising from higher contract spreads. In fact, materials, subcontracts, and other costs decreased in FY23. In such an inflationary environment that we live in today, it is comforting as a Keppel investor to see that the company has made proactive strides in increasing cost efficiency. 

In terms of overall outlook, as the world transitions to a greater reliance on clean, renewable energy, Keppel's Infrastructure Segment seems to be poised to benefit greatly. The connectivity segment will also most likely experience a surge in growth for the coming years ahead given the recent Artificial Intelligence Tech boom, increasing the demand for data center spaces. Asset Management will also help the company build up its recurring income base via an asset-light business model. Although the heavily China-centric Real Estate segment may be languishing, the recent nose-dive in China investor sentiment may represent a nadir of the economic crisis, with a potential turn-around coming in the next few years. 

Balance Sheet Health

Keppel Limited's FY23 Balance Sheet (Source: Keppel Limited FY23 Financial Report)

Total assets have more or less stayed the same, with liabilities in contrast greatly increasing due to a higher amount of non-current term loan liabilities. Gearing has crept up rather highly to a net gearing ratio of x0.90 as opposed to x0.78 the previous fiscal year. 

With a current ratio of x1.04, which is greater than 1, Keppel shouldn't see any issues when it comes to short-term debt obligations, but I must confess that the gearing slowly climbing year by year is something of concern to me. Although the figure of x0.9 itself isn't too worrying, I'm more unsettled by the trend of increasing leverage. 

Keppel FY23 Cashflow Statement (Source: Keppel Limited FY23 Financial Report)

If I'm interpreting this correctly, I believe that since Keppel requires ample amounts of cash to repay debt obligations, not much Free Cash Flow to Equity is generated, so I believe dividends are funded by debt. Additionally, Keppel has been growing its business via a spree of acquisitions to enhance inorganic growth, resulting in higher investment CAPEX. Although I do not like the fact that Keppel requires debt to fund its dividend policy, its net profit should cover the policy once CAPEX normalises. After all, the conglomerate's businesses are fundamentally cashflow-rich. 

Overall, Keppel's FY23 Financial Health is a bit iffy to me albeit manageable, so I'll continue to closely monitor it and take action should unexpected developments occur.

Valuation

Due to Keppel's unpredictable cashflows due to highly variable investing CAPEX and Net Working Capital, a Discounted Cash Flow (DCF) valuation model would be unfeasible with too many assumptions, defeating the point. Hence, I have opted for a simple historic multiple valuation.

Keppel's Historic PE Ratio (Source: GrowBeanSprout)

With valuation pegged to the historic average of x14.1 P/E using diluted earnings from continuing operations per share of 49.1 cents, the value derived would be $6.91. Although the current price is higher than the derived figure, I believe Keppel is still an attractive buy. One may argue that by using the Graham & Dodd Sustainable Earnings Power formula with 10% approximate WACC as the discount rate for a "medium-risk", flat, non-growing company should by default command a P/E of 10. However, with Keppel's transition to an asset-light, recurring income business with high growth prospects, a P/E ratio similar to CapitaLand Investment, which can be considered a comparable company of approximately 20 may be warranted. Another thing to consider is the fact that Keppel was historically in "unsexy", cyclical industries that commanded low PE valuations, which may have resulted in a deflated historical PE ratio. 

Conclusion

Overall, I believe Keppel is a high-quality business with great potential to become a "dividend compounder", with management steering the company in a direction of higher quality, predictable earnings. $6.91 per share is simply a "minimum" and conservative value. I believe that should the group continue to be on track for its 2030 vision, immense upside can continue to be captured. However, I am being cautiously optimistic, since I find the cash flow strain and leveraging to be a tad too high for my liking. I will continue to stay vested in the company for the long term and perhaps add my stakes in it along the way should the price dip below $6.91, granted I have sufficient liquidity. 

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I have a stock position in the company I have mentioned, but have no plans to add, reduce or initiate any such positions within the next 72 hours. All content published by me should not be construed as any sort of financial or investment advice and is simply for informational purposes. Although all research and figures are accurate and calculated to the best of my ability, I am not liable for any decisions made based on inaccurate information.