Stock Strategy - UOB Kay Hian 2018-09-28: Keppel Makes Offers You Can’t Refuse


Stock Strategy - Keppel Makes Offers You Can’t Refuse

  • Our deduction that Keppel was potentially acquiring M1 proved correct. The offers are S$2.06 for M1 in a pre-conditional general offer and S$1.91 for Keppel T&T in a scheme of arrangement.
  • The deal is earnings-accretive for Keppel, and does not overly stretch its balance sheet, given the target shareholding of 50%.
  • SPH sees earnings accretion, but minimal variance to valuation.
  • Axiata remains dissatisfied with the offer price, but we see no impediment to the deal’s success.
  • Offers are fair, ACCEPT OFFERS.


Two offers you can’t refuse.

  • Keppel Corporation (Keppel) announced yesterday a pre-conditional voluntary general offer (the Offer) for the shares of M1 (M1) and a scheme of arrangement (the Scheme) to acquire the remaining shares in Keppel Telecommunications and Transportation (Keppel T&T).

M1: Pre-conditional voluntary general offer of S$2.06.

  • The offeror for this deal is Konnectivity Pte Ltd (Konnectivity), and is conditional on two factors:
    1. Singapore's Info- communications Media Development Authority (IMDA) providing the necessary approvals and remaining in full force and effect, and
    2. the Offeror and its concert parties receive sufficient acceptances such that they collectively hold more than 50% of the issued share capital of M1 at the close of the offer.
  • The offer price implies 7.6x EV/EBITDA and 14.3x PE. Earliest transaction close is 15 weeks from 27 Sep 18 (ie early 2019).

~ SGinvestors.io ~ Where SG investors share

Keppel T&T: Scheme of arrangement to acquire all remaining shares at S$1.91.

  • The scheme’s requirements are:
    1. approval of > 50% of the number of shareholders representing at least 75% in value of the Keppel T&T shares held by shareholders present and voting in present or proxy. Keppel will abstain from voting, and
    2. approval from the High Court of Singapore.
  • The offer price implies 63.8x 2017 EV/EBITDA and 32.1x 2017 PE. Earliest transaction close is 22 weeks from 27 Sep 18 (ie Feb-Mar 19).

M1 acquisition is 100% debt-funded.

  • The Offer is 100% debt-funded using credit facilities provided by DBS, with an implied interest rate of ~3%. The consideration is S$1.28b assuming the Offeror and its concert parties hold 100% of M1, or S$360m for 50% of M1.

Earnings accretive deal, but earnings could slide further.

  • Using financial figures ending 31 Dec 17, the pro-forma impact of the Offeror and its concert parties holding 100% of M1 (after the Offer and the Scheme), sees EPS rise to 15.1 S cents (+27%), and net gearing rising to 0.62x (+16ppt). The impact at 50% is lower, with EPS accretion of +9% and net gearing rising to 0.53x. Both scenarios sees net gearing remain within Keppel’s comfortable limit of < 1.00x.
  • See PDF report attached for transaction impact under various scenarios. 
  • Despite the earnings accretion, we note that consensus is forecasting M1’s earnings to decline 14% y-o-y in 2019.

Keppel only seeks a controlling stake of 50% of M1’s share.

  • Management highlighted their primary goal was to seek a 50% stake in M1’s shareholding. Their intentions are not to take M1 private, unless acceptances exceed 90%. At the current shareholding, Keppel only requires an additional 17-18% stake to achieve their objective.
  • Axiata’s likely rejection of the offer does little to impede Keppel from their goal. Axiata holds a 28.5% stake in M1.

Changes will require significant investment.

  • The multi-year plan to transform M1 will require significant investment. Therefore, cash flow from M1 will likely be directed towards these investments or even pare down debt.
  • It is unlikely that Keppel will alter its dividend payout significantly with the additional cash flow from M1. It does, however, mean that M1 could pay less dividends going forward.

Control needed to drive transformation.

  • Apart from the challenges M1 faces from the fourth telco player, technology is also disrupting the business. Driving the transformation in light of these factors requires bold changes, so Keppel saw the need for control to execute it.
  • Benefits wise, the biggest is probably the acquisition of consumer data from M1, in our view. There are also smaller synergistic opportunities that Keppel can derive from controlling M1, which gives it a platform to drive B2C businesses in logistics, telecommunications, electricity supply and property.
  • It also features in Keppel’s vision to become a solutions provider for sustainable urbanisation over the longer term. That said a lot hinges on execution.


Keppel Corporation (HOLD / Target Price: S$7.37) – Foo Zhiwei

Neutral earnings impact to Keppel; benefits to manifest only in the longer term.

  • As said, the transformation will take several years and benefits are not obvious for now. Given the earnings accretion and low financing costs, the impact was less negative to Keppel’s balance sheet than we had initially thought. Near-term impact to Keppel is neutral for now, and the synergistic benefits from M1 will probably only materialise in earnings years later.
  • We remain concerned on the near-term earnings weakness on the property front. Maintain HOLD. Entry price is S$6.60.

Target price sensitivity.

  • Inputting the offer price of S$1.91 for Keppel T&T sees our valuation immediately rise to S$7.47 (+1.5%). There is no change to our valuation due to the small variance. 
  • Depending on the outcome of its acquisition of M1, a sensitivity analysis of Keppel’s valuation is presented (see PDF report attached). 

Singapore Press Holdings (HOLD / Target Price: S$2.58) – Foo Zhiwei

Benefitting from transformation, for minimal investment.

  • SPH currently holds a 13.45% stake in M1, and its stake is unlikely to change if Keppel only secures the 50% control it seeks. 
  • No cash outlay is required, and SPH benefits from earnings accretion as M1 becomes equity accounted. 
  • In the event that the Offeror and its concert parties holdings in M1 exceeds 67.23%, SPH’s stake may rise to as much as 16.13%, paying a maximum amount of S$51.3m in the process. Either way, SPH benefits from M1’s future earnings improvement at little to no cost for them.

Minimal valuation impact.

  • Factoring in the offer price of S$2.06 for M1 to our SOTP valuation yields a new target price of S$2.61 (+1.2%). A stake rise to 16.13% does not move the needle either as this is offset by the cash outlay.
  • Valuation upside remains largely hinged on SPH’s acquisition strategy for the UK student accommodation (which we remain cautious on) and its media business. Maintain HOLD. Entry price is S$2.45.

Keppel T&T (ACCEPT OFFER / Target Price: S$1.91) – Foo Zhiwei

A clean exit for minority shareholders.

  • We had suggested in late August that Keppel T&T could prove an attractive privatisation candidate. The deal is at a 26.5% premium to our fair value of S$1.51, and likely reflects the future value of its datacentre project pipeline.
  • The offer gives investors the chance to cash-in on the potential now, rather than await its longer period. ACCEPT THE OFFER.

M1 (ACCEPT OFFER / Target Price: S$2.06) – Jonathan Koh

Offer is fair, ACCEPT OFFER.

  • The offer price of S$2.06 is fair given that:
    1. M1 would be the biggest casualty of increased competition from TPG Telecom as mobile accounted for 75.7% of its total service revenue in 2Q18,
    2. By tendering their M1 shares to Konnectivity, investors avoid a painful period of intense competition and ARPU erosion that would occur in 2019 and 2020 and,
    3. We expect the consolidation of the mobile industry from four to three players to materialise in 2021 or beyond. Holding on to M1 shares would subject investors to a long wait before industry consolidation materialises.
  • At the offer price of S$2.06, M1 is valued at PE of 13.2x and EV/EBITDA of 7.2x based on financial performance in 2018F. ACCEPT THE OFFER.

Foo Zhi Wei UOB Kay Hian Research | Jonathan Koh CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-09-28
SGX Stock Analyst Report HOLD Maintain HOLD 7.370 Same 7.370
ACCEPT OFFER Maintain BUY 2.06 Up 1.880
HOLD Maintain HOLD 2.580 Same 2.580
ACCEPT OFFER Maintain HOLD 1.91 Up 1.510