KKR Has Strong Q2, Still Finding Attractive Investments

KKR & Co. L.P. (NYSE:KKR), a global alternative asset management company, declared pre-tax Economic Net Income (ENI) of $502 million during the second quarter, up from $144 million in the year ago quarter. Distributable earnings rose from $403.8 million to $701.0 million year on year.

The global giant had total assets under management (AUM) of $98 billion and fee paying assets under management of $79.7 billion as at the end of the quarter. It declared a distribution of $0.67 per unit (up from $0.42 in 2Q13), of which $0.41 constituted realized cash carry.

“Our realization activity in the second quarter drove the highest cash carry and total distributable earnings we’ve reported since going public, contributing to a quarterly distribution of $0.67. Additionally, our cash flow generation, investment performance, and balance sheet income resulted in a 29% return on equity and 22% cash return on equity over the last twelve months,” said Henry R. Kravis and George R. Roberts, Co-Chairmen and Co-Chief Executive Officers of KKR. “We also closed the KKR Financial Holdings LLC (NYSE:KFN) acquisition in the second quarter, bringing us recurring cash earnings and more permanent capital to grow the firm.”

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KKR’s quarter notable for excellent realizations

BMO Capital Markets analysts David J Chiaverini and Richard Fellinger note that KKR’s reported ENI of $0.57 was in line with BMO estimates of $0.60 after adjusting for equity based charges booked by the company that were not considered in estimates.

Strong markets enabled KKR & Co. L.P. (NYSE:KKR) to realize excellent gains reflecting in the quarterly distribution of $0.67 per unit.

Notable exits during the quarter were hospital operator HCA Holdings Inc (NYSE:HCA), Dutch company NXP Semiconductors NV (NASDAQ:NXPI), South Korean Oriental Brewery and Spanish aviation services company Avincis; in addition a stake in Sunrise Senior Living LLC (NYSE:SRZ) was sold off at a 500% return.

“We view KKR’s business model as unique in the alternative manager space owing to the significant use of its balance sheet to drive earnings growth, with more than 50% of earnings coming from its balance sheet and capital markets business,” said the BMO analysts.

Still finding investment opportunities in a bullish global environment

“KKR remains active with capital deployment, investing $2.4B (BMO $2.5B) in the quarter,” observe the analysts. “The company continues to leverage its global footprint (65% of deployment YTD outside U.S.), including making its first investments in South America and Africa during the quarter.”

The South American investment was the acquisition of Aceco, a data center business, while a stake in Afriflora, an Ethopian rose grower, was the company’s maiden African investment.

Rating and target

After factoring in the aforesaid equity based charges, BMO anticipate that ENI for 2014/2015 would be $2.53/$2.55 and accord a Market Perform rating to KKR & Co. L.P. (NYSE:KKR).

The analysts revise the Price Target to $27.

KKR & Co. L.P. (NYSE:KKR) is currently trading at $25.00.