Keppel Corp’s planned acquisition of Aermont Capital “checks all boxes” in the former’s bid to step up its transformation from a conglomerate into an asset manager.
In their Dec 5 note, Citi Research analysts Brandon Lee and Jame Osman, who have a “buy” call and $8 target price for Keppel, point out that Aermont has built up a track record of delivering both solid and consistent returns, as well as a high “re-up” rate - an indication of the management’s commitment.
On Nov 29, Keppel announced plans to acquire the European real estate asset manager, calling this an immediately accretive deal..
The transaction will be conducted in two phases. Keppel would first pay $517 million for a 50% stake in Aermont/ The second phase is seen to kick in come FY2028 when Keppel will pay another $834 million to fully acquire the firm, subject to meeting targets and other conditions.
In both phases, the consideration will be funded via a mix of cash and treasury shares.
Aermont, which manages $24 billion as of June, expects to grow this pot to $60 billion by end of FY2030 with Keppel’s backing.
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This will be achieved through the co-creation of new fund products such as data centres and private credit, with Keppel expecting to co-invest around 10% of its total fund size.
Keppel sees minimal overlap between the two entities. The acquisition will give it a real estate footprint in Europe, where it currently only has renewable and data centre assets. Aermont, on the other hand, can expand its reach in the bigger market of Asia over the longer term.
CGS-CIMB Research’s Lim Siew Khee and Kenneth Tan consider terms of the acquisition as “reasonably fair” given its implied 13x CY2023 enterprise value (EV)/earnings before interest, taxes, depreciation and amortisation (ebitda) for phase 1’s purchase, in line with 14x fetched by Aermont’s peers.
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They’ve kept their “add” call and $8.70 target price.
In their Nov 29 note, Lim and Tan acknowledge that the near-term recurring profit contribution of $9 million seems “minimal”.
Nonetheless, there’s longer-term growth potential from income from new co-created products, which will help generate both recurring income and performance fees.
Next, Aermont brings to the table some 4 billion euros of deployable capital that can be used by Keppel to fund new investments, including those in other parts of Asia, the analysts suggest.
Meanwhile, Citi’s Lee and Osman point out that computing phase 1’s price-to-earnings (P/E) through assuming FY2022 pro-rata price after tax and minority interests (patmi) of around $9 million is inaccurate, as it factors in Keppel’s cost of financing.
The analysts point out that Aermont has no borrowings, and therefore the only leakage after ebitda is tax. They estimate phase 1’s P/E at 15.3 to 17.3x, assuming 15% to 25% corporate tax rate.
They see low impact and minimal gearing to Keppel’s balance sheet from the acquisition, as up to half of the funds come from treasury shares, thereby limiting impact on future dividends and pace of resources that can be used for investments.
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Potential catalysts noted by the CGS-CIMB and Citi analysts include significant asset monetisation.
On the other hand, risks include the sharp decline in recurring income from Keppel’s assets amid weakening macro conditions, slippages in infrastructure contracts under execution which could lead to penalties and losses, as well as the overpaying for strategic acquisitions.
As at 3.40 pm, shares in Keppel Corporation BN4 are trading at one cent higher or 0.15% up at $6.76.
