Keppel Corporation - Phillip Securities 2021-11-18: Comparison Of Both Offers For SPH

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - Comparison Of Both Offers For SPH

SPH (SGX:T39) and Cuscaden Peak (Cuscaden) have entered into an implementation agreement to privatise SPH via a scheme of arrangement, after Cuscaden raised its offer to $2.36-2.40 per share.
We compared the two offers. Despite offering more certainty of deal completion and the shortest time to payout under Keppel Corp (SGX:BN4)’s offer, we believe SPH shareholders will likely go for Cuscaden’s offer as this provides a higher total consideration value and value certainty.

Maintain BUY rating on Keppel Corp with unchanged SOTP-based target price of S$7.07. We valued Keppel Corp based on the four new segments unveiled during Vision 2030 to better reflect the Group’s reporting segments going forward. Our target price translate to about 1.0x FY22e book value, in-line with its 5-year average. Catalysts expected from SPH resolution and a successful resolution to its O&M unit.

SPH and Cuscaden have entered into an implementation agreement to privatise SPH via a scheme of arrangement, after Cuscaden raised its offer to S$2.36-2.40 per share. Cuscaden’s offer comes with the optionality of a higher total value of the cash and SPH REIT (SGX:SK6U) consideration while continuing to participate in the potential future growth of SPH REIT and receive its distributions, or value certainty associated with an all-cash consideration.

SPH will proceed to hold the Keppel scheme meeting on 8 December for its shareholders to vote on the offer. The scheme meeting to vote on the latest Cuscaden offer can proceed only if SPH shareholders vote against the Keppel scheme. If approved by both set of shareholders, Keppel expect the pay-out to be sometime in mid-January 2022 having obtained regulatory approvals from the Monetary Authority of Singapore and Australia’s Foreign Investment Review Board (FIRB).
Even though Cuscaden has guided for completion some time in February 2022, we note that Keppel took about three months to obtain the requisite approvals, which means that completion of the entire transaction might take slightly longer than the guided timeline.

The revised Cuscaden offer gives SPH investors a choice between value certainty with an all cash offer of $2.36 or the opportunity to participate in the potential future growth of SPH REIT with a part cash part share offer of $2.40, based on $1.602 in cash and 0.782 SPH REIT units per share. Depending on the final proportion of SPH shareholders electing to receive SPH REIT units, a chain offer for SPH REIT may be triggered.
Figure2 in the report attached below illustrate the different scenarios and represent the possible range of outcomes under the revised Cuscaden proposal. Under the Singapore Code on Take-overs and Mergers, an offeror must make an MGO if it, together with persons acting in concert with it, has acquired 30% of more of the voting rights of the company, whether as a single transaction or a series of transaction.
With the cash and units consideration as the default option, this means that if 30% of shareholders elect for all cash consideration, an MGO will be triggered for all SPH REIT units at the minimum price of $0.964 each in cash.

The revised Cuscaden offer is higher than the implied value of the Keppel scheme consideration of $2.351 per SPH share, based on the closing price for SPH REIT ($1.020 per SPH REIT unit) and Keppel REIT (SGX:K71U) (S$1.150 per Keppel REIT unit) on 9 November 2021. Both the Cuscaden scheme consideration and Keppel scheme consideration will not be adjusted for SPH’s FY21 final dividend of $0.03 per share. Cuscaden’s offer will also not be adjusted for the $34mil break fee payable to Keppel.

Despite offering more certainty of deal completion and the shortest time to payout under Keppel’s offer, we believe SPH shareholders will likely go for Cuscaden’s offer as this provides a higher total consideration value and value certainty. Cuscaden’s offer also provides optionality to shareholders to participate in the future growth of SPH REIT or opt for an all-cash deal.

The next catalyst investors should look out for is the proposed merger of Keppel O&M and Sembcorp Marine (SGX:S51). The timeline for the parties to reach an agreement has been extended to the 1Q22 from 4Q21. While nothing has been firmed up, we view the discussions 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 will be re-rated.
The proposed transactions are expected to be earnings-accretive for Keppel in the current financial year on a pro-forma basis, although there is no guarantee of completion by this year. The group’s net debt should fall as a result of the deconsolidation of Keppel O&M and receipt of part of the consideration from the merged entity. Distribution in specie of the merged entity will, however, reduce Keppel’s shareholders’ funds. Overall, net gearing is not expected to be much affected by the transactions.
Keppel previously announced they had received bids for its logistics business, which are currently being evaluated. We expect that a binding offer could take place before the end of the year.

We maintain our BUY recommendation on Keppel with an unchanged SOTP-based target price of $7.07.
We valued Keppel Corp based on the four new segments unveiled during Vision 2030 to better reflect the Group’s reporting segments going forward.
- For its Energy & Environment business, we valued its O&M division at 0.8x book value. Keppel Infrastructure Holdings is valued at 10x FY22e earnings.
- For its Urban Development segment, we applied a 40% discount on Keppel Land’s RNAV and 1.5x book value of Sino-Singapore Tianjin Eco-City.
- In the Connectivity segment, we valued M1 at 9x FY22e earnings.
- For the Asset Management division, we valued Keppel Capital at 10x FY22e earnings, a slight discount to its peers.
We have however, raised our holding-company discount to 20% as we have turned doubtful on Keppel Corp’s ability to integrate all its different business units together.
See
Risks to our view include
1. a prolonged resolution for Keppel O&M,
2. failure to clear the SPH resolutions and
3. a worsening global economy.

Terence Chua Phillip Securities Research | https://www.stocksbnb.com/ 2021-11-18

SGX Stock Analyst Report BUY MAINTAIN BUY 7.070 SAME 7.070