On Monday, Goldman Sachs (NYSE:GS) commenced coverage on Keppel (OTC:KPELY) Corp (KEP:SP) (OTC: KPELY), assigning a Buy rating to the company's stock with a price target of SGD7.80. The firm anticipates Keppel Corp to benefit from the increasing demand for electricity and the ongoing energy transition, which are expected to drive a 14% compound annual growth rate (CAGR) in the company's core profit after tax and minority interests (Patmi) over the next three years.
The analyst from Goldman Sachs highlighted that Keppel's infrastructure segment is positioned to capitalize on the anticipated rise in Singapore's electricity demand, which is forecasted to grow from a historical 2% over ten years to 5% from 2023 to 2030. This growth is expected to be fueled by the expansion of data centers, advanced manufacturing, and the adoption of electric vehicles.
Keppel's integrated power business, which is projected to increase its capacity by 50% by 2026, stands to gain from this surge in demand. The company's return on equity (ROE) is also projected to improve, rising from 7% in 2023 to an estimated 10% by 2026. This improvement in earnings visibility and ROE is expected to lead to a re-rating of the company's multiples from the current 1x price-to-book (P/B) to above book value, aligning with the valuations of its peers in fund management and infrastructure.
Furthermore, the firm noted that Keppel's decarbonization and sustainability segment, which boasts higher margins, has seen a 21% increase in long-term contracts over the past 1.5 years. Most of these new contracts are set to start contributing to the company's earnings from 2024 onward.
In conclusion, Goldman Sachs' initiation of Keppel with a Buy rating reflects the firm's positive outlook on the company's potential to leverage structural shifts in energy demand and its strategic business expansion, coupled with an attractive expected dividend yield of 5.3% for 2025.
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