Keppel FY23 Results! Keppel Valuation & Performance Review
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.
Overview of FY23
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 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
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.
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.