Keppel Corporation – On track to exceed S$3-5bn divestment target before 2023 October 19, 2021 442

PSR Recommendation: BUY Status: Maintained
Last Close Price: 5.21 Target Price: 7.070
  • Final resolution with Brazilian company Sete Brasil now effective. The engineering, procurement and construction (EPC) contracts for six oil drilling rigs will be amicably terminated, with no penalties or refunds due to any party.
  • M1 will divest its network assets to Keppel DC REIT for a proposed consideration of S$580mn. We expect M1 to recycle the capital into new growth initiatives like the Bifrost Cable System.
  • With the latest transaction, we believe Keppel is on track to hit the higher bound and even exceed the S$3-5bn divestment target before 2023 target.
  • Maintain BUY with higher SOTP TP of S$7.07 as we incorporate Keppel Capital into our model now as it has gained in significance to warrant a value assigned to it. We valued the Group based on the four new segments unveiled during Vision 2030 to better reflect the Group’s reporting segments going forward. Our TP translate to about 1.0x FY22e book value, in-line with its 5-year average. Catalysts expected from O&M contract wins and a successful resolution to its O&M unit

The news

Keppel’s settlement agreement with Brazilian company Sete Brasil relating to its frozen rig jobs is now effective. The EPC contracts for six oil drilling rigs will be deemed to be amicably terminated, with no penalties or refunds due to any party. Keppel Offshore & Marine (Keppel O&M) subsidiary will have full title and ownership to four rigs. A sum of US$259.5mn under the outstanding invoices from Fernvale will be recognised as an undisputed debt due and owing as part of the debt under the Judicial Reorganisation Plan.

 

Keppel had received US$1.3bn (S$1.7bn) in progress payments from Sete Brasil for the six rig orders, which had a total contract value of about US$4.9bn, before payments stopped in November 2014. Keppel stopped work on the rigs in late 2015, of those four rigs, work on one is 40% finished, a second is 21% completed while the other two are less than 10% completed.

 

M1, a subsidiary of Keppel and Keppel DC REIT have signed agreements for a proposed investment by Keppel DC REIT into M1 Network Private Limited (NetCo), which will own M1’s mobile, fixed and fibre assets (Network Assets). The proposed investment is expected to be DPU accretive to Keppel DC REIT. When completed, M1 will receive a cash consideration of approximately S$580mn, or the net book value of the Network Assets.

 

Positives

+ Keppel O&M free to explore various options to extract best value from the four rigs. We believe this will work favourably for the Group as it simplifies the process of selling its legacy rigs and associated receivables to a separate Asset Co that will be formed under the non-binding MOU signed in June this year. Under the MOU entered between Keppel and Kyanite Investment Holdings (Kyanite), a wholly owned subsidiary of Temasek, the deal if materialised, will see external investors own a majority stake in Asset Co.

 

+ On track to hit higher bound of S$3-5bn divestment target. Keppel has announced monetisation of over S$2.3bn in assets from October 2020 to July 2021, and have completed about half of the transaction. The transaction between M1 and Keppel DC REIT is subjected to approvals and are expected to be completed by end of 2021. M1 is not expected to recognise any gains from this transaction and we expect the capital to be used to help M1 invest in new capabilities and also fund other growth initiatives like the Bifrost Cable System.

We believe Keppel is expected to surpass S$3bn in asset monetisation well ahead of its three-year schedule, and is likely to exceed the S$3-5bn target by the end of 2023 that it set in its Vision 2030 plans.

 

Outlook

With SPH shareholders’ approving the media-business restructuring, the EGM for the privatisation offer for SPH by Keppel could be held in mid-Nov 2021. We believe Keppel is well-positioned to enhance and unlock the value of SPH’s portfolio as the two companies are already partners in businesses such as M1, Prime US REIT (PRIME SP, TP: US$0.94) and the development of the data centre at Genting Lane in Singapore. We expect the acquisition to streamline decision-making, operational control and allow the Group to reap synergies.

 

Keppel O&M and Sembmarine (SMM SP, Non-rated) are in preliminary discussions on a potential combination. We expect some form of agreement in the fourth quarter of 2021. While nothing has been firmed up, we view the discussions positively as it provides better clarity on the fate of its O&M unit. With the overhang removed, along with the planned divestment of its logistics unit, we believe Keppel will be re-rated.

 

The proposed transactions are expected to be earnings-accretive for Keppel in the current financial year on a pro-forma basis, although there is no guarantee of completion by this year. The group’s net debt should fall as a result of the deconsolidation of Keppel O&M and receipt of part of the consideration from the merged entity. Distribution in specie of the merged entity will, however, reduce Keppel’s shareholders’ funds. Overall, net gearing is not expected to be much affected by the transactions.

Maintain BUY with higher target price of S$7.07

We maintain our BUY recommendation with a higher SOTP TP of $7.07 from $6.28 as we incorporate Keppel Capital into our model now as it has gained in significance to warrant a value assigned to it. We valued the Group based on the four new segments unveiled during Vision 2030 to better reflect the Group’s reporting segments going forward (Figure 2). For its Energy & Environment business, we valued its O&M division at 0.8x book value, unchanged from previous. Keppel Infrastructure Holdings is valued at 10x FY22e earnings, lowered from 12x previously on account of its smaller size. For its Urban Development segment, we kept our 40% discount on Keppel Land’s RNAV and 1.5x book value of Sino-Singapore Tianjin Eco-City unchanged. In the Connectivity segment, we now value M1 at 9x FY22e earnings, down from 12x previously on account of the uncertain outlook. For the Asset Management division, we valued Keppel Capital at 10x FY22e earnings, a slight discount to its peers. We have however, raised our holding-company discount to 20% as we have turned doubtful on the Group’s ability to integrate all its different business units together.

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About the author

Profile photo of Terence Chua

Terence Chua
Senior Research Analyst
Phillip Securities Research

Terence specialises in the consumer, conglomerate and industrials sector. He has over five years of experience as an analyst in the buy- and sell-side. As an institutional fund management analyst, he sat on the China-Hong Kong desk. Terence was ranked top 3 for Best Analyst under the small caps and energy category in the Asia Money poll 2018.

He graduated from the Singapore Management University with a major in Finance (Honours), and is the honoured recipient of the CFA scholarship.

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