Keppel Corporation - Plans in Place to Substantially Exit the O&M Industry

Date: 25/06/2021

Source  :  UOB KayHian
Stock  :  Keppel Corp       Price Target  :  6.37      |      Price Call  :  BUY
        Last Price  :  6.32      |      Upside/Downside  :  +0.05 (0.79%)

  • Keppel Corp (SGX:BN4)’s non-binding MOUs to combine its O&M business with Sembcorp Marine (SGX:S51) will enable it to substantially exit the O&M industry. At present, details are still being worked out and valuation numbers are unavailable. We view the developments as largely positive as it moves the company closer towards its Vision 2030 with a goal of generating a double-digit ROE and more recurring income.
  • Maintain BUY call on Keppel Corp with target price of S$6.37.

Keppel's First Step Towards Divesting of O&M

  • Keppel Corp announced that it will sell its offshore marine (O&M) business in a two-stage process:
    1. Devco and Rigco, which contains Keppel Corp’s completed and uncompleted rigs, will be sold to Assetco where Keppel Corp will retain a 20% interest while the remaining 80% will be held by Temasek and external investors; and
    2. the remainder of Keppel Offshore & Marine will be sold to a “combined entity” with Sembcorp Marine.

Non-binding MOU at this stage.

  • It is important to note that this is at a non-binding MOU stage, so there is a chance that this deal could fall through. At present, Keppel Corp, Sembcorp Marine and Temasek are the combined entity.

So what does Keppel Corp get? Some cash, some shares, some credit notes.

  • Keppel Corp will get S$500m in cash from Sembcorp Marine and an as-yet undisclosed number of shares in the combined entity, since the combined entity’s valuation has not yet been finalised.
  • Importantly, Keppel Corp has stated that it will distribute all its shares in the combined entity to its shareholders while the $500m may be distributed as a special dividend (i.e. on top of its normal interim or final dividend), if it is unable to find any projects in its other business units to invest in. Consideration for its assets vended into Assetco will be via credit notes.

We View the Developments as Generally Positive

  • Despite the lack of valuation income (instead of via orderbook) and sustainable solutions. It will still have minor exposure to the O&M industry via its 20% stake in the Assetco.

What Are the Assets That Are Up for Sale/divestment?

  • At its 2020 full-year results in Jan 21, Keppel Corp announced that it had split its O&M business into three separate units as follows:
    • RigCo: within this unit resides Keppel Corp’s completed and uncompleted rig assets, and it disclosed that it had a book value of S$2.9b (as at end-20).
    • DevCo: this unit has been tasked with completing the current S$5.8b orderbook with the end goal of enabling Keppel Corp to leave the rig-building industry.
    • OpCo: its focus is on the higher value-adding design, engineering and procurement work while fabrication will be outsourced to third parties.

Logistics business also up for sale.

  • As a reminder, Keppel Corp had also flagged that its Southeast specialist logistics company.
  • In 2020, Keppel Logistics made a loss of S$22m vs a loss of S$26m in 2019. At its 2020 full-year results briefing, management had mentioned that there were a number of interested buyers. With first bids expected in Feb 21, an announcement about a possible partial or full sale may be imminent.

Earnings Revision

  • None.

Valuation & Recommendation

We maintain our BUY rating on Keppel Corp with a SOTP-based target price of S$6.37.

  • Our SOTP-based valuation conservatively values Keppel Corp’s O&M unit at value of S$2.9b of completed and uncompleted rigs equates to S$1.87 in “value”.

Keppel Corp's valuations appear inexpensive

  • Keppel Corp's share price has fallen from its year-to-date gap can further close in the coming quarters.
  • Going forward, Keppel Corp’s China property segment should see better sales volume on a y-o-y basis given the low base in 1H20 while its infrastructure segment will have a full half-year of contribution in 1H21 from the Marina East desalination plant which started operations in Jun 20.

Catalysts to Keppel's share price

  • Finalisation and disclosure of the valuation of the O&M space in China and Vietnam.

Source: UOB Kay Hian Research - 25 Jun 2021

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