Merger Of Sembcorp Marine & Keppel Offshore Marine - UOB Kay Hian 2022-10-28: A Simpler Transaction

Sembcorp Marine & Keppel Offshore Marine | SGinvestors.io KEPPEL CORPORATION LIMITED (SGX:BN4) SEMBCORP MARINE LTD (SGX:S51)

Merger Of Sembcorp Marine & Keppel Offshore Marine - A Simpler Transaction

  • Keppel Corp and Sembcorp Marine announced the variance of their merger terms, thus making it simpler and faster to complete.
  • Our view remains that the combination of Keppel Corp’s offshore marine segment and Sembcorp Marine benefits both in the short and long term.
  • For Keppel Corp, the divestment of Keppel Offshore & Marine (KOM) 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.

A simpler and faster transaction for the KOM & SMM merger

  • Keppel Corporation (SGX:BN4) and Sembcorp Marine (SGX:S51) announced that they have varied the terms of the merger that was previously announced in Apr 22. Instead of merging with Keppel Offshore & Marine (KOM) under a new company, Sembcorp Marine (SMM) will now acquire KOM with the consideration being the issuance of new Sembcorp Marine shares. See
  • The benefit of this new method is that it is simpler given that it does not require lengthy court approvals, nor does it require Sembcorp Marine to transfer its listing status to a new holding company.
  • Importantly, the equity value exchange ratio has been amended slightly from 44:56 for Sembcorp Marine:Keppel Corp to 46:54. This has resulted in the consideration for KOM being reduced by 7.8% to S$4,495m.
  • Impact to Sembcorp Marine shareholders: For Sembcorp Marine shareholders, they will undergo less dilution vs the previous method as the price for KOM has been lowered. Overall, 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: While the consideration for KOM has been lowered, Keppel Corp shareholders will receive a larger amount of shares worth S$2.33 vs S$2.26 previously. Importantly, Keppel Corp has managed to positively modify the terms of the Vendor Notes that will be issued by the Asset Co.
  • Recall that as part of the merger with Sembcorp Marine, Keppel Corp had linked the sale of legacy oil rigs and associated receivables into a separate entity called Asset Co to be owned by a third-party investor comprising of Baluran Limited (74.9%), Temasek’s wholly-owned Kyanite (15.1%) and Keppel Corp (10%). Part of the Asset Co consideration was via 10-year fixed-rate notes with a 2% p.a. coupon, which has now been re-negotiated up to a 4% p.a. coupon instead.
  • Additionally, the sale of KOM has been de-linked to the divestment of Asset Co which at least ensures the success of the latter.

What the new Sembcorp Marine will look like.

  • In just short six months since this transaction was first announced in Apr 22, it has dramatically improved in quality. In Apr 22, the combined entity reported a net orderbook of S$6.4b as at end-21 and this has risen nearly 3x to >S$18b.
  • Both Keppel Corp and Sembcorp Marine have announced a number of large and exciting new order wins in 2022. The merged entity will have over 30 projects under execution in three broad silos: offshore renewables, new energy (e.g. floating carbon capture storage and ammonia carriers) and cleaner offshore marine solutions.
  • What has not changed is 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.

Keppel Corp reported a strong 3Q22 business update.

  • In a separate announcement, Keppel Corp reported a strong 3Q22 business update with revenue rising 24% y-o-y to S$6.8b and above our expectations. While Keppel Corp did not disclose net profit numbers for 3Q22, it did state that net profit was lower y-o-y due to the high base effect of lumpy en bloc sales which boosted 3Q21 profits.
  • The two key segments that performed well were energy & environment and asset management while, as expected, the management sounded bearish on its China property business.
  • We maintain our BUY rating on Keppel Corp and a target price of S$10.11.
  • 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.

We maintain our BUY rating on Sembcorp Marine with a target price of S$0.156.

  • With these new merger terms in place, and on the back of nearly S$6.9b of new orders in 2022, we believe that Sembcorp Marine is well placed to return to profitability in 2023.
  • 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 which constrains energy supply.
  • The risk to our thesis is for restrained capex spending despite oil and gas prices being at elevated levels, with energy companies returning cash to shareholders via dividends or share buy-backs.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-10-28
SGX Stock Analyst Report BUY MAINTAIN BUY 10.110 SAME 10.110