SEMBCORP MARINE LTD (SGX:S51)
KEPPEL CORPORATION LIMITED (SGX:BN4)
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:
- S$4.1b as consideration for Asset Co,
- S$4.9b as the pro forma estimate of the value of KOM, and
- 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.
- We have upgraded our target price for Keppel Corp to S$10.11 on the back of today’s merger announcement. Given the relatively more complex nature of the transaction, it may take time for the value of the merger to be realised.
- In addition, we note that Keppel Corp estimates that the monetisation timetable for Asset Co will be between 3-5 years.
- See
Upgrading target price for Sembcorp Marine.
- With the merger terms largely in place and the uncertainty out of the way, the focus on Sembcorp Marine will be to garner new orders in 2022 and add to its orderbook. As a result, we have raised our target book value multiple for Sembcorp Marine to 1.2x which results in an upgrade in our Sembcorp Marine target price to S$0.156 (previously S$0.13).
- In our view, the offshore construction cycle for both conventional oil and gas and renewables has room for growth in the next few years, especially given the lack of spending by the global oil and gas industry thus constraining energy supply.
- The risk to our thesis is for restrained capex spending despite oil and gas prices being at elevated levels, and instead energy companies returning cash to shareholders via dividends or share buy backs.
- See
Adrian LOH
UOB Kay Hian Research
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https://research.uobkayhian.com/
2022-04-28
SGX Stock
Analyst Report
0.156
UP
0.130
10.11
UP
7.250
