Keppel Corporation - OCBC Investment 2020-08-03: All Eyes On Temasek Now

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - All Eyes On Temasek Now

MAC clause in pre-conditional partial offer crossed; pre-condition not fulfilled as of 31 July.
Focus on Temasek’s decision – deadline 31 Aug.
Bold restructuring of the local O&M scene is required.

Keppel Corporation (SGX:BN4) reported a 25.7% y-o-y fall in revenue to S$1.3b in 2Q20 and saw a S$697.6m net loss in the quarter, compared to S$153m net profit a year ago. This was mainly due to an impairment loss of S$633m, because of the provision for contract assets and doubtful debts. The former arose mainly from several rigs as customers had requested for deferral of delivery dates of the rigs.
The provision for doubtful debts arose mainly from the O&M division, as well as the expected credit loss for a receivable in the Property division.

The Offshore & Marine division’s net loss was S$962m in 2Q20, mainly due to impairments amounting to S$889m. Excluding these impairments, net loss for the quarter was S$73m as compared to net profit of S$4m in 2Q19.
As for Property, net profit increased by S$32m to S$162m.

With the impairments, the 20% threshold in the MAC clause in respect of net profit after tax has been crossed, which means that the MAC pre-condition in Temasek’s pre-conditional partial offer has not been satisfied based on the 2Q20 results.
The offeror has set a deadline of 31 Aug 2020 to decide if it wants to invoke or waive the MAC pre-condition. Should it invoke the pre-condition, the partial offer will be terminated.

Looking ahead, the O&M division will face very challenging conditions in the near future and we believe that bold restructuring is needed. The COVID-19 pandemic has also highlighted the industry’s heavy reliance on foreign labour and some re-thinking may be required for more sustainable operations.
The Property division has limited retail and hospitality assets and management believes the office portfolio is relatively resilient to COVID-19. The impact of the pandemic is therefore mainly on residential trading projects and impact across markets is not uniform.
Meanwhile, the Keppel Marina East Desalination Plant commenced commercial operations on 29 Jun.
Work from home arrangements have further increased the demand for digital connectivity, creating new opportunities for the connectivity business.

All eyes are now on Temasek’s pre-conditional partial offer. Temasek has the right to waive its pre-conditions but if it walks away from the deal, there would be a negative knee jerk reaction on Keppel Corp's share price and traders could eye recent trough levels of S$4.82 in March 2020 and S$4.70 in early 2016 during the last oil crisis.
We note that all this is happening around the same time that Sembcorp Industries (SGX:U96) and Sembcorp Marine (SGX:S51) are having their own proposed restructuring which also involves Temasek. The EGM date for Sembcorp Industries and Sembcorp Marine is on 11 Aug.

We adjust our estimates with the recent results and our fair value for Keppel Corporation is lowered from S$7.16 to S$6.40.
An interim cash dividend of S$0.03/share has been declared, vs. S$0.08/share a year ago.
See Keppel Corp Share Price; Keppel Corp Target Price; Keppel Corp Analyst Reports; Keppel Corp Dividend History; Keppel Corp Announcements; Keppel Corp Latest News.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-08-03

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