Offshore & Marine - CGS-CIMB Research 2021-06-25: Keppel Exit To Create Mega Yard For Sembcorp Marine


Offshore & Marine - Keppel Exit To Create Mega Yard For Sembcorp Marine

  • Keppel Corporation (SGX:BN4)'s shareholders would own ~25% in the new entity to be value accretive (S$0.12) to match Sembcorp Marine (SGX:S51)’s TERP (S$0.12) post rights.
  • This is on assumption that Keppel Corp transfers its O&M op co (c.S$1.5bn) to the new Sembcorp Marine combined entity at 1x FY20 BV and if the deal goes well.
  • Near-term more positive for Keppel Corp vs Sembcorp Marine as the former is finally exiting O&M via the above and divestment of stranded rigs/receivables of S$3.9bn.
  • For Sembcorp Marine shareholders, taking up the 3:2 rights means owning a mega yard in the region backed by Temasek with potential order book of ~S$7-8bn.

Keppel Corp exit of O&M, how much will it own in the new 'Combined Entity'?

  • Keppel Corp has announced two non-binding MOUs to exit from the offshore & marine (O&M) segment.
    • First, Keppel Corp plans to sell the stranded rigs in Rig Co and Dev Co to Asset Co. The estimated book value and receivables for these assets are ~S$3.8bn (assets S$2.9bn, receivables ~S$930m). In return, Keppel Corp will receive credit notes for these assets sold and a 20% stake in Asset Co. Temasek-owned Kyanite Investment Holdings will seek external investors for the remaining 80% in Asset Co and raise funds to finish the uncompleted assets (previously guided by Keppel Corp to be ~S$500m).
    • Secondly, Keppel Corp will transfer the remaining yard assets/liabilities (Op Co) to Sembcorp Marine forming a new Combined Entity (CE). The value of Op Co will be determined using DCF basis and likely to reach a definitive agreement by 4Q21. The consideration will comprise up to S$500m in cash and Keppel Corp’s stake in CE. Keppel Corp will then distribute the stake in CE as dividend in specie to Keppel Corp’s shareholders.
  • We estimate the proforma BV of Op Co to be ~S$1.5bn after transferring out rigs and receivables as well as related party loan. Keppel Corp's Op Co’s order book is ~S$6bn after the recent FPSO contract from Petrobras. We use Sembcorp Marine post rights NTA (S$4.9bn) as the base for CE’s proforma NTA. Assuming Keppel Corp transfers Op Co at 1x P/BV (S$1.5bn), its stake could be 25% to be value accretive and neutral to Sembcorp Marine based on a TERP of S$0.12. However, we think this could be a tussle as Keppel Corp would want to divest at higher value (see Fig1 and Fig2 in report attached below for the range of how much will Keppel Corp / Sembcorp Marine shareholders own in Combined Entity).

Sembcorp Marine becoming a mega yard

  • Sembcorp Marine (HOLD, Target price: S$0.226) announced a S$1.5bn rights issue. This is after its recent S$2bn rights issuance in Sep 20. We believe S$500m will be used to pay for the merger of Combined Entity (CE) above (if successful) and the remaining for working capital.
  • Based on the proforma financials, Sembcorp Marine's NTA post rights will be S$4.9bn. We estimate TERP to be S$0.12. Long-term shareholders of Sembcorp Marine can take up the rights as the CE will be the only mega yard in the region, largely backed by Temasek with a potential order book of S$7bn-8bn with capabilities spanning across repairs, rig building and offshore renewable capabilities. However, one has to stomach near-term challenges including wider losses in CE (integration costs) and hopes of a recovery in the O&M sector in the next two years amidst a sustained rise in oil prices.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-06-25
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