AI Infrastructure And Asset Monetisation Will Drive Strong Long Term Upside

Catalysts

About Keppel

Keppel is a global asset manager and operator focused on infrastructure, real estate and connectivity, using an asset light model to grow funds under management and recurring income.

What are the underlying business or industry changes driving this perspective?

• Acceleration of asset monetisation from the $14.4 billion non core portfolio, where proceeds exceed gross debt, can rapidly recycle capital into higher returning asset light platforms. This may lift ROE above 15% and support faster earnings growth.
• Surging demand for green and tech enabled infrastructure in Asia Pacific, reinforced by the AIIB partnership to mobilise up to USD 1.5 billion, positions Keppel as a preferred sponsor in high value projects. This can drive stronger fee income and recurring operating cash flows.
• Structural growth in digital and AI driven data usage, including hyperscaler demand for data centers and subsea cables, underpins premium priced assets such as the floating data center and Bifrost Cable System. This can support higher infrastructure revenues and margin expansion.
• Scaling of funds under management from the current $91 billion towards the 2030 ambition of $200 billion, across infrastructure, digital and real estate strategies, could substantially grow management and performance fees, boosting recurring revenue and earnings visibility.
• Enterprise digitalisation and decarbonisation needs across ASEAN, from renewable power imports and high efficiency cogeneration to ICT and hybrid cloud solutions, create multi decade project pipelines. These can deepen Keppel’s integrated ecosystem and widen net profit margins.

Assumptions

This narrative explores a more optimistic perspective on Keppel compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Keppel's revenue will grow by 7.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 14.1% today to 15.1% in 3 years time.
• The bullish analysts expect earnings to reach SGD 1.2 billion (and earnings per share of SGD 0.76) by about December 2028, up from SGD 905.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SGD1.0 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 24.7x on those 2028 earnings, up from 20.3x today. This future PE is greater than the current PE for the SG Industrials industry at 20.0x.
• The bullish analysts expect the number of shares outstanding to grow by 0.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.48%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A prolonged or disorderly sale of the $14.4 billion non core portfolio, especially the $4.8 billion of legacy offshore and marine and $8.8 billion of property related assets, could force Keppel to divest at discounts in weaker markets such as China real estate. This would limit proceeds available to de leverage, fund growth and return capital, which would pressure return on equity and future earnings growth.
• New Keppel remains free cash flow negative after funding sponsor stakes, co investments and acquisitions. If operating cash inflows do not scale as quickly as planned, the group may need to rely more heavily on debt or equity to pursue its $200 billion FUM ambition, constraining balance sheet flexibility and diluting earnings per share.
• Intensifying competition and structural ARPU erosion in Singapore’s overcrowded mobile market, alongside continued weakness in the consumer segment of M1, could outweigh growth in enterprise ICT. This would limit profitability in Connectivity and cap segment contributions to group EBITDA and net margins.
• Asset management fee income is increasingly tied to fundraising and performance across infrastructure, digital and real estate funds. A turn in the global cycle for alternative assets, weaker deal flow conversion from the $39 billion pipeline or lower performance fees from platforms like Aermont could slow FUM growth and reduce recurring fee based revenue and earnings visibility.
• Keppel’s strategy depends heavily on long term secular themes such as energy transition, digitalisation and AI driven data growth. Delays or regulatory hurdles in projects like the floating data center, renewable power imports and subsea cable monetisation, or weaker than expected demand or pricing, would limit operating scale in Infrastructure and Connectivity and dampen revenue growth and operating margins over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Keppel is SGD13.17, which represents up to two standard deviations above the consensus price target of SGD10.99. This valuation is based on what can be assumed as the expectations of Keppel's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SGD13.17, and the most bearish reporting a price target of just SGD7.8.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be SGD8.1 billion, earnings will come to SGD1.2 billion, and it would be trading on a PE ratio of 24.7x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of SGD10.22, the analyst price target of SGD13.17 is 22.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.