• Keppel Corp has started arbitration proceedings against Singapore Press Holdings (SPH).
• Arbitration proceedings against SPH will lengthen the overhang on the Group until a decision by the arbitrator.
• Keppel Offshore & Marine (Keppel O&M) has been awarded $250mn in new contracts.
• 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 SPH resolution and a successful resolution of its O&M unit.

The news

Keppel Corp has started arbitration proceedings against SPH as it does not agree with SPH’s attempted termination of the Keppel implementation agreement. Keppel said that it had received a termination notice from SPH which stated, among other things, that the Securities Industry Council had no objections to SPH’s exercise of its rights to terminate the implementation agreement with Keppel.

SPH noted that the implied value of Cuscaden’s offer is superior to that of Keppel’s and that the absence of any consensus in relation to which scheme would be submitted to the High Court for approval in the event that both schemes achieve the voting majority as required is delaying the process. Keppel, on its part, maintains that its offer remains a compelling one, and should be put to SPH’s shareholders for consideration.

Separately, Keppel O&M announced that it has been awarded contracts worth around $250mn for the conversion of a Floating Storage and Regasification Unit, integration of a Floating Production Storage and Offloading vessel, and the jumboisation of two Trailing Suction Hopper Dredgers.

Our view

The arbitration proceedings against SPH will lengthen the overhang on the Group until a decision by the arbitrator. We expect that Keppel’s stock will remain capped until a final resolution on SPH is announced.

We are positive on Keppel O&M’s latest contract win that came from repeat customers amidst the challenging industry environment. This demonstrates Keppel O&M’s resilience and operational excellence in delivering projects well despite the challenges brought about by the Covid-19 pandemic.

Outlook

The next catalyst investors should look out for is the proposed merger of KOM and Sembmarine (SMM SP, Non-rated). The management is working towards signing definitive agreements by end-1Q22. The outlook of the industry is also improving, underpinned by firmer oil prices. Modern jackup rig utilisation and day rates are expected to improve (Figure 3) 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 planned divestment of its logistics unit, we believe Keppel will be re-rated.

Source: Phillip Capital Research - 11 Feb 2022