Keppel Corporation - Phillip Securities 2021-06-25: Potential O&M Merger With SembMarine & Divestment To Drive Company Re-rating


Keppel Corporation - Potential O&M Merger With SembMarine & Divestment To Drive Company Re-rating

  • Keppel Corporation (SGX:BN4) takes another step toward final resolution for Keppel O&M. The group to potentially receive up to S$500mn for its O&M legacy assets, which will be monetised over time.
  • Proposed transactions, if successful, will allow investors to benefit from merged entity’s revenue and cost synergies.
  • Maintain BUY on Keppel Corporation with higher SOTP-based target price of S$6.20 from S$6.12 as we believe the better clarity on its O&M division should narrow the O&M divisions discount to its book value, with a 10% holding-company discount.
  • Catalysts expected from contract wins and a successful resolution to its O&M unit.

The news

  • Keppel Corporation (SGX:BN4) and Sembcorp Marine (SGX:S51) have entered into a non-binding MOU for exclusive negotiations on combining Keppel O&M and Sembcorp Marine. It is envisaged that Keppel Corporation and the merged entity will enter into a 50:50 joint venture.
  • Keppel Corporation has also signed a non-binding MOU with Kyanite Investment Holdings, a wholly owned subsidiary of Temasek, to sell Keppel O&M’s legacy completed and uncompleted rigs and associated receivables to a separate asset company, which would be majority-owned by external investors.
  • Keppel Corporation will retain not more than a 20% stake in the asset company as an non-core investment. The external investors, which Kyanite will procure, will hold the balance of at least 80%.


Another step towards final resolution of Keppel O&M.

  • We believe Keppel O&M has been a major overhang for the stock. With an understanding of how a deal on Keppel O&M might be reached, we believe the potential for a re-rating. Keppel Corporation expects a definitive agreement on this in 4Q21, with the transaction expected to be completed in 2022.

Cash consideration of up to S$500mn and solution for Keppel O&M’s legacy assets.

  • If the proposed transaction is successfully completed, Keppel Corporation will receive shares in the merged entity and a cash consideration of up to S$500mn. It will be able to recycle this cash into new initiatives such as smart cities, renewables and environmental solutions, which is part of its Vision 2030 plan.
  • We also expect Keppel Corporation’s cash flow to improve over time as the external investors to be procured by Kyanite will provide capital for finishing its uncompleted rigs. Keppel Corporation’s economic exposure to the asset company, currently at S$2.9bn, will be reduced over time, as the rigs are sold or securitised when conditions in the rig chartering market improve.

Exposure to synergies and opportunities.

  • Keppel Corporation will distribute to shareholders all the merged entity shares that it receives by way of distribution in specie. This will allow investors to benefit from the merged entity’s ability to capitalise on the energy transition to areas such as offshore wind and address opportunities and challenges in the evolving and consolidating offshore & marine industry. Terms of the transaction are under discussion, and the exact exchange ratio is still to be decided.


  • While no definitive agreement has been reached, we view the latest announcement positively as it provides better clarity on the fate of its O&M unit. With the overhang removed, along with the planned divestment of its logistics unit, we believe Keppel Corporation will be re-rated.
  • The proposed transactions are expected to be earnings-accretive for Keppel Corporation for the current financial year on a pro-forma basis, although there is no guarantee that it will be completed by this year.
    • Keppel Corporation’s net debt will fall as a result of the deconsolidation of Keppel O&M and receipt of a part of the consideration from the merged entity.
    • Distribution in specie of shares in the merged entity will, however, reduce Keppel Corporation’s shareholders’ funds.
    • Overall, net gearing is not expected to be significantly affected following the transactions.

Maintain BUY call on Keppel Corp with higher target price of S$6.20

  • We maintain our BUY recommendation on Keppel Corporation and raise our target price to S$6.20 from S$6.12 as we believe the better clarity on its O&M division should narrow the O&M divisions discount to its book value.
    • We raise the value of its Offshore & Marine division to 0.7x book value, up from 0.6x.
    • We value its Property segment at a 40% discount to RNAV and Infrastructure division at 12x FY21e earnings, in line with peers.
    • We value M1 at 12x FY21e earnings, at a slight discount to listed peers’ average of 13x.
    • Keppel Corporation’s stake in Sino-Singapore Tianjin Eco-city is valued at 1.5x book value.
    • We also ascribe a 10% holding-company discount.
  • Our target price translate to about 1.0x FY21e book value, a slight discount to its 5-year average of 1.05x.
  • See
  • Risks to our view include
    1. a prolonged resolution for Keppel O&M,
    2. a weakening of oil prices and
    3. a worsening of economic uncertainties.

Terence Chua Phillip Securities Research | 2021-06-25
SGX Stock Analyst Report BUY MAINTAIN BUY 6.20 UP 6.120