Conglomerate - CGS-CIMB Research 2019-10-22: How To Extract Value From The Temasek-Linked Companies?


Conglomerate - How To Extract Value From The Temasek-Linked Companies?

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
    1. clearance of anti-trust in European Commission, China, Brazil and foreign investment in Australia,
    2. approvals from the Monetary Authority of Singapore (MAS) and Info-communications Media Development Authority (IMDA), and
    3. 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?

Beyond 2021 to rejuvenate Singapore

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2019-10-22
SGX Stock Analyst Report ADD MAINTAIN ADD 8.360 SAME 8.360