Keppel Corporation - Phillip Securities 2022-02-11: Arbitration Proceedings Against SPH To Have Muted Impact

KEPPEL CORPORATION LIMITED (SGX:BN4)

Keppel Corporation - Arbitration Proceedings Against SPH To Have Muted Impact

Keppel Corp (SGX:BN4) has started arbitration proceedings against SPH (SGX:T39).
Arbitration proceedings against SPH will lengthen the overhang on the Group until a decision by the arbitrator.

Keppel Offshore & Marine (Keppel O&M) has been awarded $250mil in new contracts.
Maintain BUY call on Keppel Corp with unchanged SOTP-based target price of S$7.07.

Keppel Corp has started arbitration proceedings against SPH as it does not agree with SPH’s attempted termination of the Keppel implementation agreement. Keppel Corp said that it had received a termination notice from SPH which stated, among other things, that the Securities Industry Council had no objections to SPH’s exercise of its rights to terminate the implementation agreement with Keppel.
SPH noted that the implied value of Cuscaden’s offer is superior to that of Keppel Corp’s (see our previous report: Keppel Corporation - Phillip Securities Research 2021-11-18: Comparison Of Both Offers For SPH) and that the absence of any consensus in relation to which scheme would be submitted to the High Court for approval in the event that both schemes achieve the voting majority as required is delaying the process. Keppel Corp, on its part, maintains that its offer remains a compelling one, and should be put to SPH’s shareholders for consideration.
Separately, Keppel O&M announced that it has been awarded contracts worth around $250mil for the conversion of a Floating Storage and Regasification Unit, integration of a Floating Production Storage and Offloading vessel, and the jumboisation of two Trailing Suction Hopper Dredgers.

The arbitration proceedings against SPH will lengthen the overhang on Keppel Corp until a decision by the arbitrator. We expect that Keppel Corp’s stock will remain capped until a final resolution on SPH is announced.
We are positive on Keppel O&M’s latest contract win that came from repeat customers amidst the challenging industry environment. This demonstrates Keppel O&M’s resilience and operational excellence in delivering projects well despite the challenges brought about by the COVID-19 pandemic.

The next catalyst investors should look out for is the proposed merger of Keppel O&M and Sembmarine (SMM SP, Non-rated). The management is working towards signing definitive agreements by end-1Q22. The outlook of the industry is also improving, underpinned by firmer oil prices.
Modern jackup rig utilisation and day rates are expected to improve as oil prices continue to rise. We expect KOM’s legacy rigs to be substantially monetised in the next three to five years on the back of the improving industry outlook. While nothing has been firmed up, we view the developments 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 Corp will be re-rated.

We maintain our BUY recommendation on Keppel Corp 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 price to book value of the 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 also applied a holding-company discount of 20% to the Group.
Our target price for Keppel Corp translates to about 1.0x FY22e book value, in-line with its 5-year average. Catalysts expected from SPH resolution and a successful resolution of its O&M unit.
See
Risks to our view include
- a prolonged resolution for Keppel O&M;
- lack of developments on the SPH resolution; and
- a worsening global economy.

Terence Chua Phillip Securities Research | https://www.stocksbnb.com/ 2022-02-11

SGX Stock Analyst Report BUY MAINTAIN BUY 7.070 SAME 7.070