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


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 reported S$697.6m net loss in 2Q20

  • 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.

Significant provisions in O&M

  • 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.

MAC clause in Temasek’s pre-conditional partial offer crossed

  • 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.

Mixed outlook

  • 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.

Pre-conditional offer hangs in the balance

  • 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.

S$0.03/share interim dividend declared

OCBC Research Team OCBC Investment Research | 2020-08-03
SGX Stock Analyst Report BUY MAINTAIN BUY 6.40 DOWN 7.160