Keppel & Sembcorp Marine To Merge - UOB Kay Hian 2022-04-28: Announcement Of The Long-Awaited Merger


Keppel & Sembcorp Marine To Merge - Announcement Of The Long-Awaited Merger

  • Keppel Corp’s and Sembcorp Marine’s merger has been gestating for a long time. In our view, the merger benefits both parties, both in the short and long term. For Keppel Corp, the divestment of Keppel Offshore & Marine will allow it to focus more on asset-light and/or recurring-fee businesses while Sembcorp Marine will become a larger and arguably more competitive entity with a strong renewables focus.
  • Maintain BUY ratings on both Keppel Corp and Sembcorp Marine.

Announcement of the long-awaited merger.

  • Yesterday, Keppel Corporation (SGX:BN4) and Sembcorp Marine (SGX:S51) announced a proposed combination involving the creation of a Combined Entity (CE) which will merge their respective offshore & marine businesses. As part of the agreement, Keppel O&M (KOM) will divest its legacy oil rigs and associated receivables into a separate entity called Asset Co which will be owned by a third-party investor Baluran Limited (74.9%), Temasek’s wholly-owned Kyanite (15.1%) and Keppel Corp (10%).
  • Impact to Sembcorp Marine shareholders: Sembcorp Marine shareholders will receive one CE share for each Sembcorp Marine share held, and Sembcorp Marine will transfer its listing status on the SGX to the CE. In addition, Sembcorp Marine will be renamed at a later stage. For Sembcorp Marine, the transaction is simpler in nature given that it is exposed to a single business line and is a pure-play on the offshore marine construction industry.
  • Impact to Keppel Corp shareholders: Keppel Corp shareholders will realise approximately S$9.4b over time, comprising of:
    1. S$4.1b as consideration for Asset Co,
    2. S$4.9b as the pro forma estimate of the value of KOM, and
    3. S$500m in cash from KOM to partially redeem certain perpetual securities previously issued to Keppel Corp.
  • The Asset Co consideration is further broken down into:
    • issuance of S$0.5m in shares of Asset Co,
    • S$120m in 10% Payment-in-kind Toggle Perpetual Securities, and
    • S$3.9b in 10-year fixed-rate notes with a 2% p.a. coupon.
  • We calculate a value accretion of S$3.44/share to Keppel Corp and thus have raised our target price for the company to S$10.11. The transaction for Keppel Corp is more complicated relative to Sembcorp Marine’s given that Keppel Corp’s includes a transaction for Asset Co.

What the Combined Entity will look like.

  • On a pro forma basis, the CE would have a net orderbook of S$6.4b as at end-21 comprising of over 50 projects in three broad silos: offshore renewables, new energy (e.g. floating carbon capture storage and ammonia carriers) and cleaner offshore marine solutions.
  • Both Keppel Corp and Sembcorp Marine management struck very positive tones during the analyst briefing, highlighting the creation of a new global player in the above three silos which will capture the strong order momentum in offshore wind farms and new energy sources like hydrogen. As expected, regulatory approval for the transaction will take a couple of months.

Why does Keppel Offshore & Marine’s net tangible asset (NTA) only represent < 19% of the CE’s NTA, but the exchange ratio is in favour of Keppel Corp?

  • We note that while the companies agreed to a 50:50 enterprise value ratio, the resultant agreed equity value exchange ratio came out to 44:56 as it took into account respective capital structures of both companies, the S$500m in cash that KOM will pay to Keppel Corp prior to closing of transaction, and other adjustments.
  • Importantly, both companies’ financial advisor used a discounted cashflow valuation methodology, thus favouring Keppel Corp’s larger orderbook of S$5.1b relative to Sembcorp Marine’s smaller orderbook of $1.3b. Given that an orderbook is forward looking (vs NTA which is backward looking), the exchange ratio was more favourable to Keppel Corp in our view.

Upgrading target price for Keppel Corp.

Upgrading target price for Sembcorp Marine.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-04-28
SGX Stock Analyst Report BUY MAINTAIN BUY 0.156 UP 0.130