Keppel Corporation - Phillip Securities 2021-08-03: Acquisition Of SPH To Accelerate Keppel’s Vision 2030

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - Acquisition Of SPH To Accelerate Keppel’s Vision 2030

Keppel Corporation's proposed acquisition of SPH to be earnings accretive, will grow recurring-income base, in line with Vision 2030.
SPH owns synergistic businesses with Keppel. Acquisition to provide opportunity for Keppel to expand and enter into secular growth areas.
Keppel's net gearing to increase to just under 1x after acquisition, which is at the upper end of its historical gearing range. No change to our forecasts pending SPH EGM and regulatory approval.

Maintain BUY and SOTP-based target price of S$6.28 for Keppel, still with 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.
Catalysts expected from O&M contract wins and a successful resolution to its O&M unit.

Keppel Corporation (SGX:BN4) has proposed an S$2.2bn offer to acquire Singapore Press Holdings (SPH, SGX:T39) through a privatisation offer after SPH’s media business has been hived off. The offer values SPH at S$3.4bn and will turn SPH into a wholly-owned subsidiary. SPH shareholders will receive S$0.668 in cash per share, as well as 0.596 Keppel REIT (SGX:K71U) unit and 0.782 SPH REIT (SGX:SK6U) unit per share.
The offer is subject to approval by the shareholders of SPH and Keppel and regulatory bodies. It is also contingent on a successful completion of SPH’s media restructuring as announced on 6 May this year. The restructuring would involve a transfer of SPH’s media assets to a company limited by guarantee, a not-for-profit entity. Keppel expects deal completion in December 2021.

The transaction values SPH at 1x implied NAV after its media-business restructuring. The deal is part of Keppel’s Vision 2030 plan to improve the quality of its earnings and increase scale in existing and new businesses. It is expected to add to its earnings on a pro-forma basis and boost its AUM as well as recurring income.
Keppel's 1H21 pro-forma EPS would increase to S$0.175 from S$0.165 had the transaction been completed at the beginning of the year. The acquisition would also improve its pro-forma recurring-income contribution from 51% to 56%, in our estimation. This, again, is in keeping with its Vision 2030 plan to be asset-light.

SPH owns a portfolio of businesses and assets which are strongly aligned with Keppel’s businesses. They are expected to complement and strengthen three out of Keppel’s four focus areas: Urban Development, Connectivity and Asset Management. The proposed acquisition would also allow Keppel to consolidate its ownership of M1 and Genting Lane data centre asset, which are currently jointly owned. A number of SPH’s assets are stable and can be monetised through Keppel-managed REITS and business trust within the next three years.
We believe the acquisition can pave the way for Keppel to expand into secular growth areas like the purpose-built student-accommodation sector and senior living. It is expected to support Keppel Land’s plans to expand from property development to urban development solutions. It would also give Keppel a foothold into the highly-resilient and fast-growing student-accommodation and senior-living sectors, where SPH has established a strong track record and presence.

Keppel Capital’s pro-forma AUM can potentially grow by about 27% from S$37bn as at end-2020 to S$47bn following the acquisition, through the addition of SPH REIT’s AUM, purpose-built-student-accommodation, senior living and other assets. This will improve the diversity of its asset classes and increase its recurring fee-based and investment income, in our view.

Keppel intends to fund the acquisition using a combination of internal cash, bank borrowings and bonds. This would raise its net gearing to the upper end of its historical gearing range, which might hamper its ability to pursue other growth initiatives in the near term, in our view.

The acquisition is subject to SPH shareholders’ approval for media-business restructuring. An EGM to approve this is expected in August or September 2021. Completion of the media-business-restructuring is one of the conditions of the scheme of arrangement, which would then be subject to shareholders approval of Keppel and SPH.
We believe Keppel is well-positioned to enhance and unlock the value of SPH’s portfolio as the two companies are already partners in businesses such as M1, Prime US REIT (SGX:OXMU) and the development of the data centre at Genting Lane in Singapore. We expect the acquisition to streamline decision-making, operational control and allow the Group to reap synergies.

We maintain our SOTP-based valuations at S$6.28 and BUY recommendation on Keppel.
See
We value its Offshore & Marine division at 0.8x book value.
We continue to 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, a slight discount to listed peers’ average of 13x.
Keppel’s stake in Sino-Singapore Tianjin Eco-city is valued at 1.5x book value. We also apply a 10% holding-company discount.
Risks to our view include
- a prolonged resolution for Keppel O&M,
- failure to clear the SPH resolutions
- a worsening global economy.

Terence Chua Phillip Securities Research | https://www.stocksbnb.com/ 2021-08-03

SGX Stock Analyst Report BUY MAINTAIN BUY 6.280 SAME 6.280