KEPPEL CORPORATION LIMITED (SGX:BN4)
SEMBCORP INDUSTRIES LTD (SGX:U96)
SEMBCORP MARINE LTD (SGX:S51)
Offshore & Marine - Watch Out For More Restructuring; Stay OVERWEIGHT
- Keep OVERWEIGHT, as expectations of further restructuring will catalyse all three offshore & marine (O&M)-related stocks’ prices.
- Top Pick: Keppel Corp (SGX:BN4), with Temasek’s partial share offer as a precursor to restructuring and catalyst to share price upside. While Keppel Corp’s O&M business should be weak over the next few quarters, the property wing could still drive profitability.
- Our next preference: Sembcorp Industries (SGX:U96), which should emerge from the de-merger with Sembcorp Marine (SGX:S51) without an O&M business and, thereafter, enjoy more stable earnings.
Expect Keppel Corp to see a restructuring if the partial offer goes through.
- In Oct 2019, Keppel Corp announced Temasek’s pre-conditional partial offer. The latter offered SGD7.35/share to acquire an additional 30.55% stake in the former – taking its stake to 51%. See report: Keppel Corporation - RHB Invest 2019-10-22: Temasek Offer – Prelude For Restructuring; BUY. The aim: To do a comprehensive strategic review and create value for shareholders.
- We note the inclusion of pre-conditions in the offer, one of which being a “No Material Adverse Change” (MAC). Whilst COVID-19 and the oil price fall has increased the probability of a MAC – more colour should be seen post 1H20’s results release on 30 Jul) – the Oct 2019 announcement also stated: “…Offer will be subject to the satisfaction and/or waiver (at the discretion of the Offeror) of the pre-conditions…”. See Keppel Corp Announcements. This suggests that Temasek can waive the pre-conditions.
Keppel Corp is likely to see respectable contributions from its non-O&M segments.
- In April, Keppel Corp said China land sales showed promise. The infrastructure unit saw a recurring 1Q20 y-o-y doubling in earnings when excluding the one-time gain from Keppel Infrastructure Trust (SGX:A7RU)’s reclassification to investment from associate. We believe these segments could support 2Q20 earnings.
Sembcorp Industries and Sembcorp Marine to gain from the restructuring…
- In June, Sembcorp Industries and Sembcorp Marine announced a proposal for the latter’s recapitalisation via a rights issuance and subsequent demerger of the two firms. See Sembcorp Industries Announcements, Sembcorp Marine Announcements. Upon completion, Sembcorp Industries will no longer be exposed to the O&M business – a positive development.
- We forecast Sembcorp Marine’s FY20 net gearing falling to 48% from FY19’s 194%, which should help it secure business in the tough O&M space. Further ahead, we believe more restructuring could occur between Sembcorp Marine and Keppel Corp’s O&M business.
…but expect a lacklustre 1H20 for Sembcorp Industries and Sembcorp Marine’s earnings.
- In May, both companies said the short-term outlook was not positive. Sembcorp Industries said COVID-19 lockdowns had reduced energy demand and prices in multiple markets, while Sembcorp Marine expects the losses trend to continue in the foreseeable quarters.
Valuation.
- We used SOP to obtain a SGD7.30 Target Price for Keppel Corp, based on the O&M division being valued at 1.3x FY20F P/BV – a discount to Sembcorp Marine’s 5- year P/BV average mean of 1.4x. Keppel Corp’s infrastructure wing is valued at 10x FY20F P/E, while the property business is valued at a 40% discount to RNAV.
- See Keppel Corp Share Price; Keppel Corp Target Price; Keppel Corp Analyst Reports; Keppel Corp Dividend History; Keppel Corp Announcements; Keppel Corp Latest News.
- Sembcorp Industries’s SGD2.11 Target Price assumes the demerger with Sembcorp Marine going through. Post demerger, its Target Price should fall to SGD1.30.
Leng Seng Choon CFA
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-07-07
SGX Stock
Analyst Report
7.300
SAME
7.300
2.110
SAME
2.110
1.130
SAME
1.130
