KEPPEL CORPORATION LIMITED (SGX:BN4)
Keppel Corporation - Revised Agreements Will Provide Greater Deal Certainty
- Keppel Corporation has entered into revised agreements in connection with the proposed offshore and marine transactions. Sembcorp Marine will now acquire 100% of Keppel Offshore & Marine (KOM) from Keppel Corp. The exchange ratio between KOM and Sembcorp Marine is revised to 54:46 from 56:44.
- Keppel Corp's shareholders will receive an estimated 19.1 Sembcorp Marine shares per Keppel Corp share based on the proposed issue price of $0.122/share.
- We believe the revised agreements provide greater certainty on the outcome of its legacy rigs and better certainty of deal completion as the revised structure benefits Sembcorp Marine shareholders through lower dilution and faster completion time.
- Keppel Corp's 9M22 revenue of $6.8bn was below of our estimates, at 69% of FY22e. The drag came from its Urban Development segment.
- Maintain BUY on Keppel Corp with unchanged SOTP-based target price of $8.95.
The news – Revised agreements in connection with the proposed offshore and marine transactions
- Keppel Corporation (SGX:BN4) has entered into revised agreements in connection with the proposed offshore and marine transactions. See:
- Keppel Corp's announcement dated 27 Oct 2022: Keppel Corporation signs revised agreements in connection with proposed O&M transactions.
- Sembcorp Marine's announcement dated 27 Oct 2022: SCM Announces Revised Transaction Structure and Improved Terms for Direct Acquisition of KOM.
- Under the revised structure and terms, Sembcorp Marine (SGX:S51) will now directly acquire 100% of Keppel O&M (excluding its legacy rigs and associated receivables) from Keppel Corp. There will no longer be a Combined Entity, and the proposed one-for-one share exchange between the Combined Entity and Sembcorp Marine, and the transfer of Sembcorp Marine’s listing status to the Combined Entity. The exchange ratio between KOM and Sembcorp Marine is revised to 54:46 from 56:44.
- The retained stake by Keppel Corp is revised to 5% in the enlarged Sembcorp Marine, instead of 10% in the Combined Entity. This means that Keppel Corp will distribute 49% of the enlarged Sembcorp Marine’s shares (instead of 46% in the Combined Entity) in-specie to its shareholders.
- Keppel Corp's shareholders will receive an estimated 19.1 Sembcorp Marine shares per Keppel Corp share based on the proposed issue price of $0.122/share with an implied value of $2.33. This is higher than the earlier indicated amount of 18.5 separate Combined Entity shares with an implied value of $2.26. In other words, Keppel Corp's shareholders will receive a higher upfront number of shares in Sembcorp Marine.
- In addition, changes have been made to the Asset Co transaction. Keppel, Baluran and Kyanite, will proceed with the transaction regardless of the outcome of the proposed combination of KOM and Sembcorp Marine. Reflecting the higher interest rate environment, the parties have agreed that the coupon for the $3.9bn in vendor notes to be received by Keppel Corp will be raised to 4% from 2%.
- Both Keppel Corp and Sembcorp Marine are targeting to complete the proposed combination by the end of 2022.
- Keppel Corp intend to seek shareholders’ approval for the transaction in early-December 2022.
The Positives
Decoupling of Asset Co transaction provides greater certainty on the outcome of its stranded rigs.
- The delinking of the Asset Co transaction from the proposed combination simplifies the transaction structure and allow the Group to move ahead with its plans to resolve the legacy rigs and associated receivables, regardless of the outcome of the proposed combination. The higher coupon rate for the vendor notes will also yield an additional $79mil of additional interest per annum, or about $236mil to $393mil over three to five years.
Better certainty of deal completion.
- The revised transaction structure benefits Sembcorp Marine shareholders as the acquisition consideration is reduced by $387mil or 10% of its market capitalisation. There will also be a lesser dilution to its existing shareholders with 3.1mil lower new Sembcorp Marine to be issued.
- The reduced transaction complexity and third party consent requirments would cut the completion time by up to two months. This is because the acquisition of KOM by Sembcorp Marine now eliminates the requirement for a separate combined entity to be interposed as the listed entity holding both KOM and Sembcorp Marine. In other words, the new terms would only require majority approval by Keppel Corp and Sembmarine shareholders, and court approval will no longer be required.
On track to exceed $5bn of asset divestment by 2023.
- Keppel Corp will be divesting Sheshan Riviera in Shanghai for RMB967mil (S$196mil), taking total assets monetised since 2020 to $4.4bn. Keppel Corp will exceed the $5bn target by 1Q23 should the proposed transaction for the divestment of KOM go through in Dec 2022 or Jan 2023.
Keppel's 3Q22 – The Negatives
Urban Development continues to drag.
- In its 3Q22 voluntary business update, Keppel Corp reported improvements in all of its business segments except Urban Development. Urban Development continued to be weighed down by slower home sales in China and fewer new project launches.
- Management disclosed that net profit for 3Q22 was lower y-o-y as it benefited from enbloc sale of a project in China last year. The net profit was not provided in this voluntary update.
Keppel Corp – Outlook
- The divestment of KOM will further transition the Group towards an asset-light structure. More importantly, the new enlarged Sembcorp Marine entity, which Keppel will hold 5% of, will be better equipped to compete against global well-resourced players from South Korea and China.
- With changes made to the Asset Co transaction, we believe management can now forge ahead to further de-risk its legacy rig assets. Management disclosed that it continues to receive active enquiries for its legacy rigs on the back of a more favourable environment.
- We expect Op Co, which comprises Keppel O&M excluding its legacy rigs and receivables to be profitable in FY22e. Op Co was profitable in 9M22.
- Keppel Capital is on track to achieve $50bn AUM by end of the year driven by the launch of its new flagship funds.
Keppel Corp – ESG
- Keppel Corp has the highest triple-A rating MSCI ESG ratings. It has held the triple-A rating since February 2020.
- Keppel Corp is ranked among the top 8% of global industrial conglomerates, based on ESG criteria, in the MSCI All Country World Index.
- Keppel Corp has been recognised by Corporate Knight’s Clean 200, as one of the companies leading the way in the transition to a cleaner energy future. We view its Vision 2030 plan to reach 7GW of renewable energy positively as it should lead to better profitability over time.
Maintain BUY with unchanged SOTP-based target price of $8.95
- We maintain our BUY recommendation on Keppel Corp with an unchanged SOTP-based target price of $8.95.
- We valued Keppel Corp based on its four new segments unveiled during Vision 2030 to better reflect the Group’s reporting segments.
- For its Energy & Environment business, we valued its O&M division at 0.8x book value but crank up the realisable value of its rigs. Keppel Infrastructure Holdings is valued at 10x FY22e earnings.
- For its Urban Development segment, we lowered the discount on Keppel Land’s RNAV to 35% (previously 40%) on better clarity on the monetisation plans for its Urban Development portfolio 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 Keppel Corp. Our target price translates to about 1.2x FY22e book value, a slight premium to its historical average as Keppel CorpGroup’s transformation plans gain traction and ROE expands to 8.8%.
- As Keppel Corp accelerates its transformation into an integrated asset-light business, we believe there is room for a further reduction in the Holdco discount we apply to the Group over time. We will review the discount we apply to Keppel Corp as the Group continues its transformation.
- See
- Risks to our view include:
- a delay in the approvals required for the Keppel-Sembmarine transaction; and
- a worsening global economy.
- Catalysts expected from approvals obtained for the transaction.
Terence Chua
Phillip Securities Research
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https://www.stocksbnb.com/
2022-10-28
SGX Stock
Analyst Report
8.950
SAME
8.950
