Brokers’ take: DBS reinstates coverage on Keppel with ‘buy’ on growth as global asset manager

DBS Group Research reinstated coverage on Keppel Corporation (Keppel) on Monday (Apr 17) with a “buy” call and a target price of S$8.30, noting the company’s rise as a global asset manager with developer and operator capabilities.  

The brokerage’s target price represents a 40 per cent upside on the counter’s last traded price of S$5.93 as at 11.10 am on Monday.

It also believes Keppel is an “undervalued gem” trading below DBS’ book value estimates of S$6.20 per share. With the new target price, the infrastructure company is valued at 1.3 times its book value. 

Analyst Ho Pei Hwa said Keppel’s robust engineering and construction roots, along with its “track record in capital management positions”, puts it in good stead as it emerges as a global asset manager.  

However, she added that although the company has achieved “remarkable progress” in its transformation from an industrial conglomerate to an asset manager and operator as part of the Vision 2023 (V2030) Plan, it is still underappreciated by the market.

The research group also expects the company’s core earnings, excluding the sale of Keppel Offshore and Marine, to hit a compound annual growth rate of 12 per cent over the next two years. 

This is mainly due to the growth of Keppel’s assets under management (AUM) which hit S$50 billion at the end of last year. 

Keppel’s efforts to quadruple its AUM to S$200 billion by 2030 and the recovery in land and property sales in China and Vietnam following the reopening of their economies, are also set to add to the company’s earnings growth. 

Ho noted that earnings quality has improved, with recurring income contributing to over 60 per cent of the group’s profits. This improvement in earnings quality is set to continue as Keppel pivots away from order book revenue to income from fees and portfolio assets. 

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“While its return on equity – at approximately 9 per cent – remains far behind the target of 15 per cent, we look forward to AUM growth and a turnaround in the property business to drive returns towards its target in the medium term,” she added.

Keppel’s growing income stream has also increased dividend yield visibility. Assuming a 50 to 55 per cent payout, the brokerage forecasts a distribution per share of S$0.28 to S$0.30 over the next two years, translating to a yield of about 5 per cent. 

Still, the market persists in perceiving Keppel as a property company, although its V2030 transformation strategy is showing results, said DBS. 

“We believe this is a golden window of opportunity for long-term investors to accumulate the emerging global asset manager.”

Shares of Keppel were trading 0.5 per cent or up S$0.03 as at 11.10 am on Monday.