Keppel Corporation - CGS-CIMB Research 2018-09-27: Digital Transformation


Keppel Corporation - Digital Transformation

  • If Axiata rejects the pre-conditional Voluntary General Offer (VGO) by Keppel and SPH to acquire M1 at S$2.06/share, the deal still goes through as it takes another effective c.18% from the market to gain 51%.
  • Keppel Corp’s share price may be under pressure until completion of the transactions in 1Q19. The privatisation of Keppel T&T at S$1.91 is highly likely to go through.
  • Maintain ADD with an unchanged Target Price of S$8.82 based on RNAV.

Two separate transactions

~ SGinvestors.io ~ Where SG investors share
  • The offer prices represent a 26% and 40% premium of the last traded prices respectively.
  • The entire transaction is estimated to take up to 15 months’ earnings.

Why buy a telco?

  • The objective is to gain control and merely buying a telco.
  • Without transformation, M1 will remain a non-core investment. However, management thinks a successful digital transformation (which includes cost optimisation with growth initiatives) will make M1 a core business. The details of the transformation were not shared but we believe it will take a few years to materialise.
  • Assuming Axiata (c.28% stake in M1) is the only shareholder to reject the offer, the deal will still go through. It will result in Keppel and SPH jointly owning c.72% of M1 via the offering company, Konnectivity (Keppel: 80% and SPH 20%). The entity is likely to be de-listed in this case.

Cleaner with 100% in KT&T

  • The KT&T scheme was proposed to logistics businesses.
  • Payment of monies (c.S$277m) to KT&T’s shareholders is estimated to be in 1Q19. ~ S G investors . io ~ Where SG investors share

Gearing to go up to 0.6x, incremental c.S$39m profit in FY19F

  • A 100% acquisition of M1 and KT&T will increase Keppel’s net gearing from 0.4x in 1H18 to S$360m for a 50% acquisition.
  • Assuming a 100% acquisition of M1, the deal will add a c.S$39m net profit or 4% to Keppel in FY19F (based on our M1’s FY19F profit of S$113m and 3% financing cost).

Maintain ADD and Target Price of S$8.82, near term could see upside capped

  • We think short-term pressure on share price persists on
    1. perceived dilutive strategy of buying a telco, and
    2. the intensifying competitive landscape with TPG’s entrance by end-18.
    ~ S G investors . io ~ Where SG investors share
  • Our ADD call remains on a longer-term basis and a leap of faith on management’s transformation plan post completion.
  • Other catalysts include high oil price that could spur E&P spending.

Refer to the PDF report attached for details of SOP valuation. 

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-09-27
SGX Stock Analyst Report ADD Maintain ADD 8.820 Same 8.820