Singapore Stocks Strategy - CGS-CIMB Research 2018-09-24: Transactions On The Cards

KEPPEL CORPORATION LIMITED SGX:BN4 M1 LIMITED SGX:B2F SINGAPORE PRESS HLDGS LTD SGX:T39

Singapore Stocks Strategy - Transactions On The Cards

Keppel Corp has announced possible transactions involving M1, Keppel Telecommunications and Transportation (Keppel TT) and Singapore Press Holdings (SPH).
We think a partial stake divestment in Keppel TT to strategic investors is more likely while privatisation could cost Keppel Corp c.S$150m.
M1’s share price could react positively if there is mandatory general offer (MGO) while Keppel Corp and SPH could benefit from any stake divestment.

Keppel Corp and SPH made a general announcement regarding their stake in M1, which may or may not lead to a transaction, while Keppel is also separately considering a transaction involving its interest in Keppel Telecommunications and Transportation (Keppel TT). Trading on both M1 and Keppel TT has been halted.
We think there could be third-party interest in the M1 stake given its share price weakness. Keppel TT and SPH own 19.2% and 13.4% of M1, respectively. For Keppel TT, the current value of M1 is significant at S$0.52/shr, representing c.38% of its market cap.
On Keppel’s 80% stake in Keppel TT, we think a deal could go both ways – a privatisation that will cost the group c.S$150m or a partial divestment to strategic partners. Both make sense to grow the data centre, e-commerce and logistics businesses, although the use of a lead-up announcement lowers the chance of a direct buyout.
We maintain our ADD call on Keppel Corp and target price of S$8.82 and forecast muted share price reaction to this news. We think there will not be a significant impact from privatisation but any stake divestment in Keppel TT/M1 could mean additional cash.

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Recall that Axiata, Keppel and SPH earlier announced in Mar 2017 a joint strategic review of their stakes in M1, which subsequently concluded in Jul 2017. We think Axiata could be an interested buyer should M1’s share price turn attractive.
If a buyer emerges for Keppel’s and SPH’s combined 32.6% stake, it could trigger a mandatory general offer (MGO), which we think could be positive for M1’s share price. Apart from this potential catalyst, we see no near-term change in business value till industry consolidation.
No change to our HOLD rating on M1 and DCF-based Target Price of S$1.50 (WACC: 7.1%).

SPH announced it was approached by Keppel regarding a possible transaction involving its indirect interest in M1. Its 13.4% stake in M1 is a major component of the equities investment, which forms c.40% of SPH’s S$1.1bn investible fund. If there is a successful divestment of the M1 stake at the current share price of S$1.63, we think SPH could receive proceeds of S$203m, which accounts for about S$0.13/shr.
We believe SPH could retain the bulk of proceeds to fund its new investment strategy of overseas property asset management while a small portion could be paid out as special dividends on top of the 5.5% dividend yield that the stock currently offers, based on our FY18F DPS of S$0.15.
Maintain ADD on SPH with SOP-based Target Price of S$2.88.

ADD, Target Price S$8.82.
Active asset recycling and a stronger balance sheet could lead to a higher DPS. We like Keppel Corp for its multi-asset growth platform and relatively stronger O&M margins.

HOLD, Target Price S$1.50.
While fixed services and mobile postpaid continue to be its growth pillars, we still see risks from more MVNO competition and TPG’s service launch in 2H18, which we think are priced in at current levels.

ADD, Target Price S$2.88.
As the largest newspaper publisher in Singapore, SPH has diversified into property (owns 69% of SPH REIT) and the aged care business. It also has S$1.1bn in investible funds.

LIM Siew Khee CGS-CIMB Research | FOONG Choong Chen CGS-CIMB Research | NGOH Yi Sin CGS-CIMB Research | https://research.itradecimb.com/ 2018-09-24

SGX Stock Analyst Report ADD Maintain ADD 8.820 Same 8.820

HOLD Maintain HOLD 1.500 Same 1.500

ADD Maintain ADD 2.880 Same 2.880