• If Axiata rejects the pre-conditional Voluntary General Offer (VGO) by Keppel and SPH to acquire M1 at S$2.06/share, the deal still goes through as it takes another effective 18% from the market to gain 51%.
• Keppel Corp’s share price may be under pressure until completion of the transactions in 1Q19. The privatisation of Keppel T&T at S$1.91 is highly likely to go through.
• Maintain ADD with an unchanged Target Price of S$8.82 based on RNAV.

Two Separate Transactions

Transaction 1: Together with Singapore Press Holdings - SPH (SGX:T39), Keppel announced a VGO for M1 Limited (SGX:B2F) at S$2.06.

Transaction 2: Keppel is taking Keppel Telecommunications & Transportation Ltd - KT&T (SGX:K11) private at S$1.91.

• The offer prices represent a 26% and 40% premium of the last traded prices respectively.
• The entire transaction is estimated to take up to 15 weeks from now (1Q19) to complete, which includes getting approval from IMDA. The offer price implies an EV/EBITDA of 7.6x and P/E of 14.3x based on M1’s last 12 months’ earnings.

Why Buy a Telco?

The objective is to gain control and digitally transform M1’s operations to create synergy with Keppel’s business in data centre, connectivity, smart nations initiatives and urbanisation strategy. We trust that management has a game plan in mind and not merely buying a telco.

Without transformation, M1 will remain a non-core investment. However, management thinks a successful digital transformation (which includes cost optimisation with growth initiatives) will make M1 a core business. The details of the transformation were not shared but we believe it will take a few years to materialise.

Assuming Axiata (c.28% stake in M1) is the only shareholder to reject the offer, the deal will still go through. It will result in Keppel and SPH jointly owning 72% of M1 via the offering company, Konnectivity (Keppel: 80% and SPH 20%). The entity is likely to be de-listed in this case.

Cleaner With 100% in KT&T

The KT&T scheme was proposed to simplify Keppel’s corporate structure and allow a more efficient allocation of resources and capital within the group. It would also allow Keppel to better support KT&T to grow its data centre and urban logistics businesses.

Payment of monies (c.S$277m) to KT&T’s shareholders is estimated to be in 1Q19.

Gearing to Go Up to 0.6x, Incremental S$39m Profit in FY19F

A 100% acquisition of M1 and KT&T will increase Keppel’s net gearing from 0.4x in 1H18 to 0.6x in FY19F. Cash outlay for the M1 offer is estimated to be S$1.28bn assuming a 100% acquisition and S$360m for a 50% acquisition.

Assuming a 100% acquisition of M1, the deal will add a S$39m net profit or 4% to Keppel in FY19F (based on our M1’s FY19F profit of S$113m and 3% financing cost).

Maintain ADD and Target Price of S$8.82, Near Term Could See Upside Capped

We think short-term pressure on share price persists on

1. perceived dilutive strategy of buying a telco, and
2. the intensifying competitive landscape with TPG’s entrance by end-18.

Our ADD call remains on a longer-term basis and a leap of faith on management’s transformation plan post completion.

Other catalysts include high oil price that could spur E&P spending.

Source: CGS-CIMB Research - 27 Sep 2018