Keppel Corporation - DBS Research 2020-08-11: Temasek Not Proceeding With Partial Offer

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KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - Temasek Not Proceeding With Partial Offer

• Share price pressure to persist as Temasek invoked MAC pre-conditions and pulled the partial offer.
• Potential restructuring of Keppel Corp remains evolving and fluid at this juncture.
• Await catalysts and evidence on business turnaround and ROE enhancement.

Downgrade Keppel Corp to HOLD

• Downgrade Keppel Corp (SGX:BN4) to HOLD; Target Price revised down to S$5.50, after lowering property valuation from 1.0x to 0.9x P/BV, in tandem with our property analyst’s recent downgrade on sector valuation and O&M from 1.5x to 1.0x P/BV.
• While we remain sanguine on Keppel Corp’s longer-term prospects, near term upside could be capped by operational headwinds. Temasek’s withdrawal of the partial offer removes an imminent catalyst.
• Keppel Corp is trading at 0.9x P/BV (c.1SD below mean). Our Target Price implies ~1.0x FY20 P/BV, which seems fair against ~8% ROE with ~3% dividend yield in 2021.
• Further re-rating requires more evidence of macro turnaround and ROE enhancement towards the group’s target of 15%.

Temasek partial offer is off…

• On 10 Aug, Temasek announced that it would not proceed with the partial offer for Keppel Corp following its breach of MAC preconditions.
• As a recap, Keppel Corp reported massive impairment of S$919m in 2Q20, which led to e non-fulfilment of the MAC clause, that required Keppel Corp to report not more than 20% decline in 12-month Trailing Profit After Tax (12M Trailing PAT) or approx. S$557m. See report: Keppel Corporation - DBS Research 2020-08-03: Temasek Partial Offer – Deal Or No Deal?. With the latest set of results, Keppel Corp’s 12M Trailing PAT stands at a loss of S$165m.

…. Under Takeover Code, Securities Industry Council of Singapore (SIC)’s consent is required for another offer within 12months from the previous unsuccessful attempt.

• 16.7 Council's consent for subsequent offers. Any person who intends to make a partial offer for the same offeree company within 12 months from the date of the close of a previous partial offer (whether successful or not) must seek the Council's prior consent. The Council will not normally grant its consent unless the subsequent partial offer is, as would be normally required, recommended by the board of the offeree company and proposed to be made by a person not acting in concert with the previous offeror. All such subsequent partial offers must comply with all the requirements in this Rule.

No partial offer; but how about restructuring?

• While it seems a little grey if the abovementioned Takeover code is applicable to Keppel Corp’s case as Temasek’s partial offer had yet to be officially launched and was pulled due to the non-fulfilment of MAC precondition, we are not putting high hopes on another offer by Temasek soon. Nevertheless, we are also not ruling out any other contingency plans relating to the restructuring of Keppel Corp. It remains evolving and fluid in our view.

Keppel to focus on implementing its Vision 2030: A sustainable Future.

• At the end of May 2020, Keppel Corp unveiled Vision 2030 to chart its growth path in the next decade. See report: Keppel Corporation - DBS Research 2020-05-29: Vision 2030 ~ A Sustainable Future. Building on its current transformation plan, Keppel Corp is taking a bigger step to refocus its portfolio towards sustainable urban solutions and connectivity as well as enhance collaboration across divisions. It will continue to executive the plans while engaging its largest shareholder Temasek to explore opportunities on strategic collaboration.

Longer-term prospects intact but near-term catalysts seem lacking.

• We believe in the long-term value of Keppel Corp, with its sound strategies in place to deliver 15% ROE target with good dividends and strong growth trajectory. But, Keppel Corp's share price performance in the short term might be overshadowed by weak outlook on its property and O&M divisions.

More indicators of operational improvement.

• We will monitor positive indicators such as property launches, home sales and land sales, O&M contract wins, write-back of 2Q O&M impairment which may call for a re-rating of Keppel Corp.

What could be the good entry points?

• Keppel Corp's share price dropped to S$5.18 post reporting weak 2Q20 results. It hit a recent low of S$4.93 in Mar-2020 during market sell-off amid COVID-19 pandemic fears. During the last oil crisis, the P/BV trough was around 0.8x in 2016, which translates to ~S$4.70 (based on estimated BVPS of S$5.87 for FY20).
• See Keppel Corp Share Price; Keppel Corp Target Price; Keppel Corp Analyst Reports; Keppel Corp Dividend History; Keppel Corp Announcements; Keppel Corp Latest News.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2020-08-11

SGX Stock Analyst Report HOLD DOWNGRADE BUY 5.50 DOWN 6.400