Keppel Corporation has once shone as a star stock in Singapore's market, soaring 162% over 2022 and 2023, making it one of the top performers in the Straits Times Index (STI).

Keppel will release its latest earnings results on August 1. Each earnings release may signal a potential investment opportunity, but before diving in, investors need to understand how to interpret their financial statements.

To decode Keppel's performance, let's examine its earnings, especially from the perspectives of its asset-light approach, revenue and profit growth, and dividend and buyback strategy.

1. Asset-light approach

Keppel Corporation, with its diverse operations in Asset Management, Energy & Environment Services, Urban Development, and Connectivity, unveiled a transformation plan in 2020 to pivot towards an asset-light strategy. The goal was to offload underperforming assets and make greater use of external ones to streamline the company and drive the shift towards a more nimble, asset-light business model.

In the past two to three years, Keppel has successfully hit SGD several billion in asset sales, with the notable divestiture of its offshore and marine branch, Keppel Offshore & Marine, which brought in SGD 3.3 billion in gains from the sale.

The move to an asset-light strategy has brought about three main improvements:

First, it has reduced the company's debt levels and lowered operational risks. The sale of assets has led to better debt ratios and enhanced Keppel's ability to pay off debts. Specifically, the debt-to-asset ratio, which measures the company's overall debt against its assets, decreased significantly from 65.3% in 2020 to 58.9% in 2023. We can keep an eye on how Keppel's debt management and liquidity continue to evolve.

Meanwhile, Keppel's total assets have shrunk from SGD 32.1 billion in 2020 to SGD 26.8 billion in 2023, reflecting a notable reduction in the balance sheet. We may need to keep an eye on the trend of Keppel's debt ratio and total assets moving forward.

Second, Keppel's return on equity (ROE) has benefited. ROE is calculated by dividing net income by net assets. By divesting less profitable assets, Keppel has been able to enhance the return on its remaining core assets. Additionally, leveraging external assets has also improved the earnings potential of Keppel's owned assets. As a result, the company's asset-light transformation has, to some extent, boosted its ROE. From 2020 to 2022, Keppel's ROE improved significantly from -4.61% to 8.12%. In 2023, Keppel's return on equity (ROE), excluding profits from discontinued operations, stood at approximately 8.2%.

Third, its market valuation has been enhanced. Investment holding companies like Keppel, with their intricate mix of businesses and some less profitable divisions, often attract lower market valuations. In Keppel's case, while the net assets have consistently been valued at over SGD 11 billion, its market capitalization has frequently fallen short of this figure, sometimes dipping below SGD 5 billion, which suggests a considerable undervaluation.

With its strategic shift and focus on core operations, Keppel's market capitalization has climbed, topping SGD 12 billion by the end of 2023. This has pushed the price-to-book ratio to approximately 1.16, reflecting a marked improvement in market valuation and signaling increased investor confidence.

2. Revenue and profit

During Keppel's restructuring, its total revenue experienced fluctuations, especially after selling off parts of the business, leading to a dip in sales figures. Currently, it's essential to keep tabs on the revenue and profit margins from Keppel's main business segments.

As Keppel began concentrating on bringing in more external capital, asset management became a focal point for growth. At the close of 2022, Keppel's assets under management were valued at SGD 55 billion, with an ambitious target of reaching SGD 200 billion by 2030. Investors should regularly review Keppel's financial statements for updates on their fund-raising achievements.

The company's asset management segment has shown steady revenue growth, rising from SGD 135 million in 2020 to SGD 283 million in 2023, and this should be closely watched for future growth signals.

The Energy & Environment and Connectivity sectors, which are the major revenue streams, offer limited growth but are notable for their reliable cash flows, and their steady revenue streams should be monitored.

Keppel is gradually moving away from its Urban Development business, which suggests that this sector may see a decline in revenue and become less significant for investors.

When it comes to profits, the focus should be on the growth of Keppel's recurring net income from ongoing operations, as these are more reliable indicators of sustainable performance compared to one-time gains from real estate or other unique projects. In 2023, Keppel's recurring profits reached SGD 770 million, making up 88% of the total profits, and showed a 54% increase from the year before. It will be important to watch whether Keppel can continue to increase the proportion of recurring profits and maintain this positive growth trend.

3. Dividends and share buybacks

A public company's commitment to its shareholders can often be gauged by its dividend payouts and share buyback initiatives.

Dividends directly return value to shareholders, and share buybacks indicate a company's confidence in its future, while also providing market liquidity and potentially boosting share prices.

In recent years, Keppel has noticeably stepped up its dividend payouts and share repurchases. We've seen a substantial increase in Keppel's dividend amount over the last three years, reaching around SGD 640 million in 2022. Despite a slight decrease in 2023, the dividend payout remained near SGD 600 million.

Additionally, Keppel repurchased about SGD 500 million worth of shares in 2022, totaling a shareholder return of SGD 1.13 billion.

Moreover, in 2023, Keppel distributed the over SGD 4 billion worth of shares it received from the sale of Keppel Offshore & Marine to Sembcorp Marine as a special dividend to all shareholders. Keppel also announced in its mid-year report for 2023 that it would distribute a portion of its holdings in Keppel REIT units as a special dividend to shareholders.

Overall, Keppel has been quite generous in rewarding shareholders over the past few years. Moving forward, we may continue to monitor whether the company will maintain its robust approach to shareholder returns.

In summary:

• Keppel is undergoing an asset-light transformation. We should watch for further progress in this transition and its impact on debt ratios, return on equity, and valuation levels.

• In terms of revenue, we should keep an eye on the growth of Keppel's asset management business and the stability of its Energy & Environment segment.

• For profits, the focus should be on the proportion and growth of recurring profits.

• Regarding dividends and buybacks, we should observe whether the company will continue to reward its shareholders generously in the future.