Keppel Corporation - Another delay to potential combination of Keppel O&M and Sembcorp Marine

• Keppel Corp and Sembcorp Marine announced another delay to the potential combination of the two entities.
• Significant progress made on advancing the sale of Keppel Offshore & Marine’s (KOM) legacy rigs and associated receivables.
• Keppel Telecommunication & Transportation Limited (Keppel T&T) has entered into an agreement for the divestment of its entire stake in Keppel Logistics to Geodis International for a cash consideration of $80mn. We expect the divestment to improve the Group’s ability to meet its 15% ROE target.
• Maintain BUY with unchanged SOTP TP of S$7.07. We valued the Group based on the four new segments unveiled during Vision 2030 to better reflect the Group’s reporting segments going forward. Our TP translates to about 1.0x FY22e book value, in-line with its 5-year average. Catalysts expected from a successful resolution of its O&M unit.

The news

Keppel Corp and Sembcorp Marine announced that while significant progress has been made on advancing the proposed combination, including mutual due diligence, the transaction structure, exchange ratio and other related matters, more time and deliberation will be required to complete due diligence, reach mutual agreement on the transaction terms and finalise definitive legal documentation.

Both parties remain committed to continue with exclusive negotiations and work towards a definitive agreement by 30 April 2022.

Keppel T&T has entered into an agreement for the divestment of its entire stake in Keppel Logistics to Geodis Internation SAS (GEODIS) for a consideration of approximately $80mn, valuing Keppel Logisitics at enterprise value of $150mn on a cash free debt free basis. This transaction includes Keppel Logisitics’ businesses in Singapore, Malaysia and Australia, as well as UrbanFox.

Positives

+ Significant progress made on advancing the sale of KOM’s legacy rigs and associated receivables. Keppel had previously announced that it will be transferring its legacy completed and uncompleted rigs and associated receivables to a separate company (Asset Co) that would be majority owned by external investors. This Asset Co transaction and the proposed combination between KOM and SembMarine will be inter-conditional and are being pursued concurrently.

Should the proposed transaction be successfully completed, external investors will provide capital for completing these uncompleted rigs, which would reduce Keppel’s capital requirement. Keppel’s economic exposure in Asset Co is also expected to be reduced over time, as the rigs or Asset Co are sold or securitised when conditions in the rig chartering market improve.

+ Keppel announced divestment of its logistics business. We expect the divestment of Keppel Logistics to improve the Group’s ability to meet its 15% ROE target. For FY21, the Keppel Logistics entities being divested to GEODIS registered a net loss after tax of $5.2mn. The proposed divestment of its non-core business that has been operating at a sub-scale level, is in line with its Vision 2030 plans to simplify and focus its bsuienss as well as to enhance its earnings.

We believe that Keppel T&T’s priority will now be to scale up in its focus areas of sustainable data centre solutions and subsea cable systems. The capital unlocked from this transaction will also fund its new growth initiatives.

Negatives

– Second delay to potential combination of KOM and Sembcorp Marine. While we are naturally concerned about another delay to the potential combination of the two entities, we note that the current extension to 30 April 2022 is just a month away. We believe that the two entities are working expeditiously to reach a mutual agreement on the transaction terms and are working towards a definitive agreement as quickly as possible.

Outlook

With the chapter on Singapore Press Holdings (SPH SP, Non-rated) now closed, we turn our attention to the proposed merger of KOM and Sembmarine (SMM SP, Non-rated). Management is working towards signing definitive agreements by end-April 2022. 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 divestment of its logistics unit, we believe Keppel will be re-rated.

Maintain BUY with unchanged SOTP target price of S$7.07

We maintain our BUY recommendation with an unchanged SOTP TP of $7.07. We valued the Group based on the four new segments unveiled during Vision 2030 to better reflect the Group’s reporting segments going forward (Figure 2). 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.