Keppel Corporation – SMM announce EGM on 16 Feb 2023

2 Feb 2023
  • Sembcorp Marine (SMM) will hold an extraordinary general meeting (EGM) on 16 Feb 2023, to vote on its proposed acquisition of Keppel offshore & marine.
  • The independent financial adviser (IFA) for the deal saw its terms as fair and reasonable, and had advised the independent directors to recommend that shareholders vote in favour of the deal.
  • We believe the better clarity on the deal time-line and future management team will reduce overhang on the stock. The new enlarged Group will also be able to better capitalise on the energy transition.
  • Maintain BUY with unchanged SOTP TP of $8.95. 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 1.2x FY22e book value, a slight premium to its historical average as the Group’s transformation plans gain traction and ROE expands to 8.8%. Catalysts are expected from approvals obtained for the transaction.

 

The news

SMM has released a circular (link here) detailing the EGM to be held on 16 Feb, to vote on its proposed acquisition of Keppel’s offshore & marine unit.

 

Key highlights of the circular – The newly merged entity will have a new board and management team. Chris Ong, CEO of KOM, will replace Wong Weng Sun as CEO of the new merged entity. Mr Wong will remain as Senior Adviser to the new board for an unspecified period to facilitate a smooth transition. The existing SMM directors (except for Mr Yap Chee Keong, Deputy Chairman) will be stepping down upon the completion of the proposed combination to allow for a re-constitution of the Board.

 

The IFA are of the view that the terms of the proposed combination are fair and reasonable. It has recommended SMM shareholders vote in favour of the proposed combination.

 

Recall that based on the aggregate consideration of S$4.495bn for KOM (Deloitte, the independent valuer valued KOM at S$4.3-5.3bn), SMM will issue approximately 36.8bn new shares to Keppel at the issue price of S$0.122 per share.

 

Should the proposed transaction be approved by SMM shareholders, SMM expect the completion of the entire transaction on or prior to 28 February 2023.

 

Positives

+ Better clarity on the deal time-line and future management team will reduce overhang on stock. We believe the clearer roadmap for the merged entities will provide more clarity to shareholders and reduce the overhang on the stock.

 

+ New enlarged Group will be able to better capitalise on the energy transition. With Chris Ong, a veteran at the helm of the new enlarged Group, we believe the Group will be able to take advantage of opportunities in offshore renewables and new energy. Chris Ong has been the CEO of KOM since July 2017, and is concurrently the Managing Director of Keppel Renewable Energy.

 

Outlook

The divestment of KOM will further transition the Group towards an asset-light structure. More importantly, the new enlarged SMM 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. The completion of the Asset Co transation is expected to take place on or prior to 28 February 2023.

About the author

Terence Chua
Senior Research Analyst
Phillip Securities Research

Terence specialises in the consumer, conglomerate and industrials sector. He has over five years of experience as an analyst in the buy- and sell-side. As an institutional fund management analyst, he sat on the China-Hong Kong desk. Terence was ranked top 3 for Best Analyst under the small caps and energy category in the Asia Money poll 2018.

He graduated from the Singapore Management University with a major in Finance (Honours), and is the honoured recipient of the CFA scholarship.

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