• Temasek, a major shareholder of Keppel Corp with a 20.45% stake, has announced a partial offer to acquire an additional 554.9m shares (or 30.55%) at S$7.35/share. This would raise its stake to 51% and allow it to push through strategic changes within Keppel Corp, with the O&M segment being the key business unit up for review, in our view.
• Maintain BUY. Target price: S$7.61.

What’s New

A nice price.

• Temasek Holdings (Temasek), which owns 20.45% of KEPPEL CORPORATION (SGX:BN4), announced that it will voluntarily acquire an additional 554.9m shares (or 30.55%) of Keppel Corp at S$7.35/share, subject to pre-conditions. This will result in Temasek owning 51% of the company. The S$7.35 offer price is at a 26% premium over Keppel Corp's last traded price, and a 21% premium over the 3-month volume weighted average price (VWAP) of S$6.07, and is only 3.5% lower than our target price of $7.61.

The purpose of the offer.

• Temasek wants to gain a majority control of Keppel Corp and allow it and Keppel Corp to “undertake a comprehensive strategic review of its businesses”.
• In our view, the most obvious business that would come under scrutiny is Keppel Offshore Marine which has struggled in the past few years. As a result, this may mean that Temasek and Keppel Corp may look at divesting its stake in the shipyard to a separate holding company.
• Other businesses which could be put into a separate energy-focused company would be energy-related businesses such as PENGUIN INTERNATIONAL LIMITED (SGX:BTM), DYNA-MAC HOLDINGS LTD. (SGX:NO4) and KRISENERGY LTD. (SGX:SK3).

Not a done deal.

• There are a number of domestic and foreign regulatory approvals that need to be obtained, and the partial offer can only be made if and when each of the pre-conditions are satisfied or waived. These approvals include anti-trust clearances in the European Union, China and Brazil, the foreign investment clearance from Australia, and other regulatory clearances from the Monetary Authority of Singapore (MAS) as well as the Info-communications Media Development Authority (IMDA) as Temasek will have an indirect interest in M1. This process is expected to take “several months”.

Stock Impact

Positive ramifications for Sembcorp Marine (HOLD/Target: $1.22) and Sembcorp Industries (HOLD/Target: $2.22).

• With Temasek clearly wanting to realise more value in its Singapore-based investments, the obvious stock that has been badly hit by the downdraft in the offshore & marine (O&M) sector is SEMBCORP MARINE (SGX:S51); hence, a restructuring of the business – via amalgamation with Keppel Offshore Marine – could take place in the medium to longer term once the Keppel Corp offer is completed.

The market likes the read-across to other stocks.

• Clearly, the market has taken a very rosy view towards the prospects of both SEMBCORP INDUSTRIES (SGX:U96) and Sembcorp Marine given that their share prices were up 10.1% and 11.7% respectively after the announcement yesterday.
• See Sembcorp Share Price; Sembcorp Marine Share Price.
• However, we caution that on the earnings front, Sembcorp Marine is facing headwinds in the next 1-2 quarters given that the lack of orderflow ytd will impact its bottom line.
• See also
  • Sembcorp Analyst Reports; Sembcorp Announcements; Sembcorp Latest News;
  • Sembcorp Marine Analyst Reports; Sembcorp Marine Announcements; Sembcorp Marine Latest News;

Earnings Revision / Risk

• None.

Valuation / Recommendation

• Re-iterate BUY and target price of S$7.61, based on SOTP valuation. Keppel Corp’s current one-year forward PE of 12.3x based on our 2020 forecast appears inexpensive as it is below its 5-year average of 14.5x. In addition, the company’s 1-year forward P/B multiple of 0.9x is more than 1SD below its 10-year historical average of 1.5x.
• See Keppel Corp Share Price.

Share Price Catalyst

• Inorganic and earnings-accretive acquisitions in the property space in China and Vietnam.
• New order wins for the offshore & marine segment.

Source: UOB Kay Hian Research - 22 Oct 2019