Keppel Corporation - UOB Kay Hian 2020-08-11: Disappointingly, Temasek Withdraws Partial Offer – But Not All Is Lost

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - Disappointingly, Temasek Withdraws Partial Offer – But Not All Is Lost

Temasek announced that, pursuant to Keppel Corp (SGX:BN4)’s poor 2Q20 results that were affected by nearly S$1b in impairments, it will invoke the MAC pre-condition and thus withdraw its partial offer for Keppel Corp.
We had expected a decision after, not before the Sembcorp Industries-Sembcorp Marine EGM on 11 August. We point out that nothing stands in the way of Temasek coming back to the table with a revised offer in the next 6-12 months.

Temasek announced yesterday that, as a result of Keppel Corporation having breached one of the Material Adverse Change (MAC) clauses at its recent 2Q20 results, it will invoke the MAC pre-condition. As a result, it will not proceed with the partial offer to acquire c.31% of Keppel Corporation at S$7.35/share. In addition, the Securities Industry Council of Singapore has confirmed that it has no objection to Temasek’s withdrawal of the partial offer by invoking the MAC pre-condition.

We had expected Temasek to waive the MAC pre-condition and come back with a lower revised price for Keppel Corporation, assuming that the Sembcorp Industries/Sembcorp Marine EGM to be held on 11 August successfully passes all three inter-conditional resolutions.

We can only surmise that Temasek, despite its large balance sheet, wants to conserve cash for its other portfolio companies at present. At the time of the initial partial offer in Oct 19, the world and Singapore was in a much different place given that COVID-19 had yet to rear its head, however, in the past few months, Temasek has had to contend with the capital requirements from Singapore Airlines (SGX:C6L) and Sembcorp Marine (SGX:S51), among others.
In addition, the COVID-19 pandemic coupled with the downturn in the oil and gas industry – which has affected the Chinese and Korean shipyards as badly as Singapore’s – may have given Temasek cause to believe that it has time on its side to strategically position and consolidate its shipyard investments.

But not all is lost since we note that neither the original partial-offer announcement nor the offer withdrawal contained any moratorium clause. Thus, there is a chance for Temasek to return to the table with a revised offer in the next 6-12 months, in our view, assuming that Sembcorp Industries and Sembcorp Marine successfully demerge and that there is no secondary wave of COVID-19 infections.
On our estimates, we believe that a revised offer may value Keppel Corporation at 1.1x to 1.2x P/B, or S$6.29 to S$6.86/share.

None. Note that post Keppel Corporation’s recent 2Q20 results announcement, we had downgraded our 2020 net profit estimates to take into account the S$919m in impairment charges for the quarter. See report: Keppel Corporation - UOB Kay Hian 2020-08-03: 2Q20 Larger-Than-Expected Impairments.
We do not expect Keppel Corporation to register a loss for the full year given that its property and infrastructure segments continue to recover from COVID-19-related business downturn.

We retain our BUY rating on Keppel Corporation but have lowered our SOTP-based target price to S$6.70 (-6.3% from prior target price of S$7.10) as we have increased our holding company discount to 15% from 10%. We believe the wider discount is warranted given the uncertainty around the timing of another Temasek partial offer. See details of SOTP in PDF report attached below.
Fundamentally, some of Keppel Corporation’s businesses are well on the road towards recovery, eg its infrastructure segment which saw improved core earnings y-o-y in 2Q20 as well as property investment. In addition, Keppel Corporation’s shipyard may potentially restart operations in earnest in the current quarter.
See Keppel Corp Share Price; Keppel Corp Target Price; Keppel Corp Analyst Reports; Keppel Corp Dividend History; Keppel Corp Announcements; Keppel Corp Latest News.
We highlight that Keppel Corporation’s one-year forward P/B multiple of 0.84x is below -1SD level of 1.01x, and a significant discount to its 10-year historical average of 1.45x.
Keppel Corp's share price catalyst: Earnings-accretive acquisitions in the property space in China and Vietnam; new order wins for the offshore & marine segment.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-08-11

SGX Stock Analyst Report BUY MAINTAIN BUY 6.70 DOWN 7.100