Keppel Corporation - UOB Kay Hian 2019-10-22: Unlocking Value

KEPPEL CORPORATION LIMITED (SGX:BN4) | SGinvestors.io KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - Unlocking Value

  • Temasek, a major shareholder of Keppel Corp with a 20.45% stake, has announced a partial offer to acquire an additional 554.9m shares (or 30.55%) at S$7.35/share. This would raise its stake to 51% and allow it to push through strategic changes within Keppel Corp, with the O&M segment being the key business unit up for review, in our view.
  • Maintain BUY. Target price: S$7.61.


WHAT’S NEW


A nice price.





The purpose of the offer.

  • Temasek wants to gain a majority control of Keppel Corp and allow it and Keppel Corp to “undertake a comprehensive strategic review of its businesses”.
  • In our view, the most obvious business that would come under scrutiny is Keppel Offshore Marine which has struggled in the past few years. As a result, this may mean that Temasek and Keppel Corp may look at divesting its stake in the shipyard to a separate holding company.
  • Other businesses which could be put into a separate energy-focused company would be energy-related businesses such as PENGUIN INTERNATIONAL LIMITED (SGX:BTM), DYNA-MAC HOLDINGS LTD. (SGX:NO4) and KRISENERGY LTD. (SGX:SK3).

Not a done deal.

  • There are a number of domestic and foreign regulatory approvals that need to be obtained, and the partial offer can only be made if and when each of the pre-conditions are satisfied or waived. These approvals include anti-trust clearances in the European Union, China and Brazil, the foreign investment clearance from Australia, and other regulatory clearances from the Monetary Authority of Singapore (MAS) as well as the Info-communications Media Development Authority (IMDA) as Temasek will have an indirect interest in M1. This process is expected to take “several months”.


STOCK IMPACT


Positive ramifications for Sembcorp Marine (HOLD/Target: $1.22) and Sembcorp Industries (HOLD/Target: $2.22).

  • With Temasek clearly wanting to realise more value in its Singapore-based investments, the obvious stock that has been badly hit by the downdraft in the offshore & marine (O&M) sector is SEMBCORP MARINE (SGX:S51); hence, a restructuring of the business – via amalgamation with Keppel Offshore Marine – could take place in the medium to longer term once the Keppel Corp offer is completed.

The market likes the read-across to other stocks.



EARNINGS REVISION/RISK

  • None.


VALUATION/RECOMMENDATION

  • Re-iterate BUY and target price of S$7.61, based on SOTP valuation. Keppel Corp’s current one-year forward PE of 12.3x based on our 2020 forecast appears inexpensive as it is below its 5-year average of 14.5x. In addition, the company’s 1-year forward P/B multiple of 0.9x is more than 1SD below its 10-year historical average of 1.5x.
  • See Keppel Corp Share Price.


SHARE PRICE CATALYST

  • Inorganic and earnings-accretive acquisitions in the property space in China and Vietnam.
  • New order wins for the offshore & marine segment.





Adrian Loh UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-10-22
SGX Stock Analyst Report BUY MAINTAIN BUY 7.610 SAME 7.610



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