Keppel Corporation – Rival bid for SPH weigh despite strong 3Q21 performance November 3, 2021 560

PSR Recommendation: BUY Status: Maintained
Target Price: 7.070
  • 3Q21 net profit was a significant improvement YoY with improved performance in all its segments.
  • With the latest rival bid from a Temasek-backed consortium for SPH, we outline three possible scenarios that Keppel could undertake and the implications of all the different scenarios.Discussions on proposed Keppel O&M and SembCorp Marine combination and establishment of Asset Co progressing steadily. Timeline for a potential definitive agreement extended to 1Q22 from 4Q21.
  • Maintain BUY with unchanged SOTP TP of S$7.07. 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 SPH resolution and a successful resolution to its O&M unit.

Positives

+ Significant improvement in 9M21 profit with revenue in-line. In its 9M21 voluntary business update, Keppel reported improvements in its profits driven by improved performance in all its segments. The net profit was not provided in this voluntary business update.

 

Energy & Environment: Keppel O&M was profitable for 9M21, reversing the net loss from last year. Keppel O&M also achieved overheads reduction of over S$90mn in YTD 2021 and will continue to streamline its operations. With the recent rise in oil prices, management is seeing signs of improvement in the jackup rig market. Utilisation rates are improving and Keppel O&M has been receiving more enquiries on bareboat charters for its rig assets, though the sale of rig assets may take longer to materialise. The O&M net orderbook was S$5.5bn, up 67% from S$3.3bn at end-2020.

 

Urban Development: Keppel Land’s total home sales was stable at 810 in 3Q21 vs. 800 for the same period last year. 3Q21 revenue was softer due mainly to the impact of revenue recognition of completed properties during the period.

 

Connectivity: 3Q21 revenue growth driven by strength in data centres. Despite the drag of lower roaming and prepaid revenue on M1’s top-line, earnings for the quarter was higher YoY from the growing enterprise business.

+ 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 (Figure 2), 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. Keppel is likely to exceed the S$3-5bn target by the end of 2023 that is set in its Vision 2030 plans. We believe Keppel will use the capital unlocked to invest in organic and inorganic growth plans and distribute some of the proceeds to reward shareholders.

 

+ No provisions to be set aside for lawsuit from EIG Global Energy Partners. The lawsuit brought against Keppel O&M was first served in February 2018. EIG Global Energy Partners is a leading provider of institutional capital to the energy sector globally. The court has, in May 2020, amongst other orders, dismissed part of the plaintiffs’ claims in that lawsuit. The management is of the view that there are many disputed facts concerning the plaintiffs’ claim for aiding and abetting fraud. On that basis, Keppel O&M’s US counsel is of the opinion that overall, Keppel O&M has very good defences to the plaintiffs’ claim. As such, Keppel will not be setting aside any provisions for the lawsuit.

 

Negatives

– Rival offer for SPH from Temasek-backed consortium. With a new rival bid from a Temasek-backed consortium, Keppel may have to raise their offer bid for SPH. The consortium comprising Hotel Properties Ltd (HPL), businessman Ong Beng Seng, and two Temasek-linked entities, CLA and Mapletree, are proposing to acquire SPH at $2.10 per share in cash. The consortium vehicle, Cuscaden Peak, is 40% held by a HPL unit called Tiga Stars, 30% by Temasek unit CLA Real Estate Holdings and 30% by the Mapletree group. Property group Mapletree is also a Temasek-linked entity.

 

The offer price of $2.10 per share is slightly higher than what has been offered by Keppel. Recall that Keppel had in August offered to privatise SPH at S$2.099 per share. This offer comprises cash of $0.668 per share, 0.596 Keppel Reit unit (valued at $0.715) and 0.782 SPH Reit unit (valued at $0.716) per share.

 

Pursuant to the terms of the implementation agreement, Keppel has the opportunity, within ten business days, to improve their current proposal and we expect an announcement soon.

Possible scenarios

With a new rival offer for SPH, we list down the list of possible scenarios that Keppel may undertake in response to the new competitive bid.

Option 1: Keppel exercises “Switch Option” and returns with a revised offer. Under the Switch Option, Keppel will make the offer on the same or better terms as those which apply to the Scheme. 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 believe Keppel could return with another offer to reap the synergies from the acquisition.

 

In such a scenario, we believe the gearing could be pushed higher. Keppel had a net gearing of 0.76x as at end-Sept 21, we believe Keppel could propose another offer while keeping net gearing at ~1x. We see the possibility of Keppel doing a rights issue in order to keep gearing levels manageable.

 

Option 2: Keppel abstains from making another offer. It walks away from the deal and takes the $34mn break fee, which translates to about 1.86 Singapore cents earnings per share accretion.

 

Option 3: Competitive situation in the absence of any agreement between the parties as to any alternative procedure for resolving this competitive situation. The Auction Procedure, provided for by the Securities Industry Council will apply, in order to provide an orderly framework for its resolution.

 

Mechanism – In an Auction Procedure, either or both offerors may announce a revised offer on the Auction start date. An offeror shall then be able to announce a revised offer on the next day, provided that the offeror has announced a revised offer on the Auction start date. The only manner in which either offeror may revise its offer is by unconditionally increasing the cash consideration payable under its offer by a fixed amount of at least S$0.01. The process described above shall continue, on sequential days unless and until, on any given day, neither offeror announces a revised offer, in which case the Auction Procedure shall end at 6 pm on the day in question.

Outlook

Keppel previously announced they have received bids for its logistics business, which are currently being evaluated. We expect that a binding offer could take place before the end of the year.

 

Keppel O&M and Sembmarine (SMM SP, Non-rated) are in preliminary discussions on a potential combination. The timeline for the parties to reach an agreement has been extended to the 1Q22 from 4Q21. 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.

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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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