Citigroup: C-Corp Conversion Raises 'Absolute Upside' For KKR

One logical corollary of the tax reform is companies scrambling to take advantage of reduced tax rates.

KKR & Co. L.P. Unit KKR recently announced Q1 results and also communicated the decision to convert itself from a partnership to a corporation, effective July 1, in a bid to broaden its investor base, simplify its structure and make it easier for investing in its shares.

The Analyst

Citigroup analyst William Katz upgraded KKR from Neutral to Buy and increased his price target from to $23.50 to $27. The analyst is removing the "high-risk" designation.

The Thesis

KKR's C-Corp conversion will increase relevance of the sector, leading to positive revaluation among alternative asset managers, Katz said in a note. The analyst also sees the conversion increasing absolute upside for KKR.

"KKR's C-Corp conversion should increase Long Only appeal but does not go far enough in our view," the analyst said.

The analyst raised his 2018 ENI estimates from $1.81 to $2.31 and maintained his 2019 estimate unchanged at $2.92, but lowered his 2020 estimate from $2.92 to $2.79.

Citi attributed the upward revision to the price target to the updated NAVs, increased balance sheet value, lower cost of capital to discount performance fees and tax benefits on the company's C-Corp conversion.

The Price Action

KKR shares have added 4.2 percent in the year-to-date period. The stock traded around $22.40 at time of publication, up 3.7 percent on the day.

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