• Group takes another step toward final resolution for Keppel O&M.
• Keppel to potentially receive up to S$500mn for its O&M legacy assets, which will be monetised over time.
• Proposed transactions, if successful, will allow investors to benefit from merged entity’s revenue and cost synergies.
• Maintain BUY with higher SOTP TP of S$6.20 from S$6.12 as we believe the better clarity on its O&M division should narrow the O&M divisions discount to its book value, with a 10% holding-company discount. Our TP translate to about 1.0x FY21e book value, a slight discount to its 5-year average of 1.05x. Catalysts expected from contract wins and a successful resolution to its O&M unit.

The news

Keppel Corporation and Sembcorp Marine have entered into a non-binding MOU for exclusive negotiations on combining Keppel O&M and Sembcorp Marine. It is envisaged that Keppel and the merged entity will enter into a 50:50 joint venture.

Keppel has also signed a non-binding MOU with Kyanite Investment Holdings, a wholly owned subsidiary of Temasek, to sell Keppel O&M’s legacy completed and uncompleted rigs and associated receivables to a separate asset company, which would be majority-owned by external investors. Keppel will retain not more than a 20% stake in the asset company as an non-core investment. The external investors, which Kyanite will procure, will hold the balance of at least 80%.

Positives

+ Another step towards final resolution of Keppel O&M. We believe Keppel O&M has been a major overhang for the stock. With an understanding of how a deal on Keppel O&M might be reached, we believe the potential for a re-rating. Keppel expects a definitive agreement on this in 4Q21, with the transaction expected to be completed in 2022.

+ Cash consideration of up to S$500mn and solution for Keppel O&M’s legacy assets. If the proposed transaction is successfully completed, Keppel will receive shares in the merged entity and a cash consideration of up to S$500mn. It will be able to recycle this cash into new initiatives such as smart cities, renewables and environmental solutions, which is part of its Vision 2030 plan.

We also expect Keppel’s cash flow to improve over time as the external investors to be procured by Kyanite will provide capital for finishing its uncompleted rigs. Keppel’s economic exposure to the asset company, currently at S$2.9bn, will be reduced over time, as the rigs are sold or securitised when conditions in the rig chartering market improve.

+ Exposure to synergies and opportunities. Keppel will distribute to shareholders all the merged entity shares that it receives by way of distribution in specie.

This will allow investors to benefit from the merged entity’s ability to capitalise on the energy transition to areas such as offshore wind and address opportunities and challenges in the evolving and consolidating offshore & marine industry. Terms of the transaction are under discussion, and the exact exchange ratio is still to be decided.

Outlook

While no definitive agreement has been reached, we view the latest announcement 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 for the current financial year on a pro-forma basis, although there is no guarantee that it will be completed by this year. The group’s net debt will fall as a result of the deconsolidation of Keppel O&M and receipt of a part of the consideration from the merged entity. Distribution in specie of shares in the merged entity will, however, reduce Keppel’s shareholders’ funds. Overall, net gearing is not expected to be significantly affected following the transactions.