Keppel Corporation - CGS-CIMB Research 2019-12-09: Waiting For The Big Decision


Keppel Corporation - Waiting For The Big Decision

  • KEPPEL CORPORATION (SGX:BN4) could trade between S$6.61 and S$7.00 as Temasek takes 9-10 months from Oct 19 to complete its partial offer for Keppel Corp at S$7.35/share.
  • Blue-sky scenario: by 1Q21, Sembcorp Industries (SGX:U96) and Keppel Corp to dilute their stakes in O&M and SMM via dividends in specie into a new O&M vehicle to catch the upcycle.
  • Maintain ADD with an unchanged Target Price of S$8.36, still based on SOP.

Keppel shareholders can wait 9-10 months to realise the offer value

  • We expect Temasek to take at least six months from Oct 19 to satisfy all of the pre-conditions, including
    1. clearance of anti-trust issues 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).
  • In addition, Keppel Corp’s financial performance is not expected 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 Corp’s shareholders. The entire process could take at least 9-10 months and Keppel Corp’s share price could stay range-bound. 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 the share price could settle at the top-end of the range at S$7.00 in the near term.

Beyond 2021 to rejuvenate Singapore

  • Freeing up Keppel Corp’s balance sheets could give rise to options for more synergy creation, including an asset swap between Keppel Corp’s infrastructure (9M19 BV: S$1.5bn) and Sembcorp Industries’ urban development (1H19 BV: S$906m) to realise the hidden gem, namely the Vietnamese industrial parks.
  • Keppel Corp 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.

O&M getting better

  • We expect the O&M margin, which came in at 5.2% in 3Q19 (1H19: 3.1%), to remain strong over the next few quarters. YTD order wins stood at S$1.9bn with order book at S$5.1bn. We project the final settlement of Sete Brasil rigs to take place by 1Q20, which could add US$166m-316m of new orders (see report dated 7 Oct 2019).
  • We also expect Keppel Corp to end the year with c.S$2.2bn of new wins. We keep our S$3bn target intact for 2020.

Property expects stronger 4Q19

LIM Siew Khee CGS-CIMB Research | 2019-12-09
SGX Stock Analyst Report ADD MAINTAIN ADD 8.360 SAME 8.360