KEPPEL CORPORATION LIMITED (SGX:BN4)
SEMBCORP INDUSTRIES LTD (SGX:U96)
SEMBCORP MARINE LTD (SGX:S51)
Conglomerate - How To Extract Value From The Temasek-Linked Companies?
- Keppel Corporation (SGX:BN4) could trade between S$6.61 and S$7.00 as Temasek takes 9-10 months to complete its partial offer for Keppel Corporation at S$7.35/share (1.06x 9M19 NAV).
- Blue sky scenario: by 1Q21, Sembcorp Industries (SGX:U96) and Keppel Corporation to dilute their stakes in O&M and Sembcorp Marine (SGX:S51) via dividend in species into a new O&M vehicle to catch the upcycle.
- Sembcorp Industries’s utilities could be crystallised given the above. Keppel Corporation’s infrastructure business could be swapped with Sembcorp Industries’s urban development for better synergy.
About the partial offer
- Temasek subsidiary Kyanite Investments intends to make a partial offer to acquire a 30.55% stake in Keppel Corporation (Temasek currently already has a 20.45% stake) at S$7.35/share, subject to pre-conditions. If successful, Temasek and Kyanite could own 51% of Keppel Corporation.
- Temasek and Kyanite has up to 12 months (21 Oct 2020) to satisfy the pre-conditions. We estimate that Temasek may need to fork out a total of S$4.08bn for the additional 30.55% stake in Keppel Corporation.
Keppel Corp shareholders can wait 9-10 months to realize the offer value
- We estimate the S$7.35/share partial offer for Keppel Corporation by Temasek implies c.1.06x of Keppel Corporation’s 9M19 net asset value. This excludes Keppel Capital’s asset management valued at c. S$960m (c.S$60m/p.a. fee at 16x P/E).
- We expect Temasek to take at least 6 months to satisfy ALL of the pre-conditions, including
- clearance of anti-trust in European Commission, China, Brazil and foreign investment in Australia,
- approvals from the Monetary Authority of Singapore (MAS) and Info-communications Media Development Authority (IMDA), and
- written confirmations, consents, approvals/waivers from the counterparties of all material contracts (above S$500m).
- (See the details of Voluntary Pre-Conditional Cash Partial Offer at Keppel Corp Announcements dated 21-Oct-2019)
- In addition, Keppel Corporation’s financial performance is not to deteriorate meaningfully over the 12-month long-stop date (21 Oct 2020). Following the pre-conditions, it could take 3-4 months to get the nod from > 50% of Keppel Corporation’s shareholders. The entire process could take at least 9-10 months.
Keppel Corp’s share price could stay rangebound at S$6.61 to S$7.00
- The excitement over the S$7.35 offer (25.9% above the last traded price) could push Keppel Corp's Share Price closer to the offer price in the near term. This could also be capped by the +/-5% profit-taking arbitrage, implying a top-end range of S$7.00.
- However, the downside of the long and tedious process for pre-conditions could lead to a lethargic share price, trading lower to S$6.61 (weighted 51% at S$7.35 and 49% of its last traded price of S$5.84).
- We maintain our SOP Target Price for Keppel Corporation at S$8.36.
- See Keppel Corp Share Price; Keppel Corp Target Price.
Keppel Corp shareholders entitled to divest 38.91% to 78.51% of their holdings
- Short-term investors may take profit above S$7.00 or upon the periodic updates of the 50% shareholders’ approval of the deal. This is to not risk the uncertainty of pro-rated allocation of the ultimate Keppel Corporation shares ranging from a minimum of 38.91% to a maximum of 78.51%.
- We see long-term value in Keppel Corporation post divestment of O&M, freeing up capital for its asset-light and investment strategy. We think the injection of O&M assets only make sense by 2021 assuming the cycle starts to recover, while 2020 is the year to resolve the remaining issues from Brazil and KrisEnergy (SGX:SK3).
Sembcorp Industries to realise value in utilities but near-term still weak
- The implied valuations for Sembcorp Industries’s utilities business stubs have been around 7.8x since 2010, while its utilities peers have traded in the range of 12-14x. We think dividend in specie/share swap of Sembcorp Marine into new O&M entity appear to be the best option for Sembcorp Industries given its high net debt position of S$8.7m and 1.07x net gearing ratio (as of 1H19).
- In the upcoming 3Q19F results, we expect -27% q-o-q and -34% y-o-y net profit growth for Sembcorp Industries to c.S$67m on the back of weaker India operations (lower plant load factor for SEIL2) and the absence of EI settlement in 2Q19.
Sembcorp Marine upside capped in the near term
- Since 2016, Sembcorp Marine has been trading at an average of 1.4x P/BV. As such, the upside from current valuations of c.1.3x could be capped by another 10%. In addition, weak orders of c.S$575m may see losses persist into 1H20F. We think investors can wait for share price weakness to accumulate later.
- Meanwhile, Sembcorp Marine still needs to urgently resolve the bribery investigation into its Brazilian operations before any injection into the new O&M unit. We expect Sembcorp Marine to post a c.S$30m net loss in its upcoming 3Q19 results filing.
Any more upside for Sembcorp Industries and Sembcorp Marine after the 10-11% surge?
- We think yes for both stocks, but the crystallisation of values can only be realised by 1Q21, at the earliest, for any meaningful M&As. See Sembcorp Industries Share Price; Sembcorp Marine Share Price. We think a possible hypothetical scenario could involve the following:
- Formation of a new Offshore & Marine (O&M) entity;
- Dividend in specie of Keppel Corporation’s O&M into a new O&M entity at c.1.3x P/BV or S$3.6bn (benchmarking Sembcorp Marine’s current valuations). Keppel O&M’s BV was S$2.8bn as of 9M19;
- Sembcorp Industries privatises Sembcorp Marine at a 10-20% premium This includes the conversion of S$2bn subordinated loans (from Sembcorp Industries to Sembcorp Marine) and S$1.5bn bond issue (by Sembcorp Industries to Temasek) into equities;
- Sembcorp Industries injects Sembcorp Marine into the new O&M entity via a share swap. Sembcorp Industries owns < 50% of new O&M entity. With lower O&M exposure, Sembcorp Industries’s utilities could re-rate and trade up to utilities peers’ valuations of 12-14x CY21F P/E or S$4.8bn-S$6bn, implying 1-1.2x CY19F P/BV vs. utilities’ ROE of c.8%.
- The new O&M entity is ultimately owned by Sembcorp Industries, Keppel Corporation’s existing shareholders (including Temasek), minority shareholders of Sembcorp Marine, and a small free float.
Beyond 2021 to rejuvenate Singapore
- Freeing up the balance sheets of both Sembcorp Industries and Keppel Corporation could give rise to options of more synergy creation, including Sembcorp Industries taking on Keppel Corporation’s infrastructure (9M19 BV: S$1.5bn) swapping with its urban development for S$906m (1H19 BV: S$906m) to realise the hidden gem, namely the Vietnamese industrial parks.
- Keppel Corporation could buy / recycle property-related assets to achieve its mid-term 15% ROE target, while benefiting from the redevelopment of the Greater Southern Waterfront.
- We do not rule out the divestment of M1 to StarHub (SGX:CC3) to help the ailing telco segment and create a cleaner structure for Temasek-linked companies (TLCs).
- Maintain Overweight on the sector.
- See recent SGX market updates: Highlights of Temasek’s SGX-Listed Investments.
- See also
LIM Siew Khee
CGS-CIMB Research
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https://www.cgs-cimb.com
2019-10-22
SGX Stock
Analyst Report
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