Keppel Corporation - OCBC Investment 2020-08-11: Temasek Walks Away… For Now?


Keppel Corporation - Temasek Walks Away… For Now?

  • Pre-conditional partial offer will not proceed.
  • Keppel Corp Share Price to lose its support.
  • Value in stock, but catalysts remain few and far between.

Pre-conditional partial offer dropped

  • On 10 August 2020, it was announced that that Kyanite Investment Holdings, an indirect wholly-owned subsidiary of Temasek, has decided that it will invoke the Material Adverse Change (MAC) pre-condition, and that the partial offer will not proceed. See Keppel Corp Announcements. The Securities Industry Council of Singapore has confirmed that it has no objection to the Offeror withdrawing the partial offer by invoking the MAC pre-condition.
  • Recall that Keppel Corp (SGX:BN4) had recorded a significant amount of impairments in its latest 2Q20 results which meant that the partial offer hung in the balance; the offeror had set 31 Aug 2020 as the deadline to decide if it wanted to invoke or waive the MAC pre-condition.

Share price to lose its support

  • The pre-conditional partial offer was first announced on 21 October 2019, and Keppel Corp’s closing price prior to the news was S$5.84. The latest closing price (7 August 2020) of S$5.40, is already lower by 7.5%, but we see further downside.
  • As mentioned in our 3 August 2020 report, “Keppel Corporation - OCBC Investment 2020-08-03: All Eyes On Temasek Now”, if Temasek walks away from the deal, there would be a negative knee jerk reaction on the share price and traders could eye recent trough levels of S$4.82 in March 2020 and about S$4.70 in early 2016 during the last oil crisis. However, any shorting activity by short-sellers could also cause the price to overshoot on the downside.

Value in the stock, but when can it see light?

  • Putting the partial offer aside, investors should consider Keppel Corp on a stand-alone basis.
  • 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.
  • We maintain our sum-of-parts fair value estimate of S$6.40 and see value in the stock, though near-term catalysts may be lacking especially after this latest development.
  • 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 | 2020-08-11
SGX Stock Analyst Report BUY MAINTAIN BUY 6.400 SAME 6.400