The acquisition of Singapore Press Holdings (SPH) by Keppel Corporation looks to be a “winning hand” according to the analysts, Ho Pei Hwa, Geraldine Wong, Rachel Tan and Derek Tan at DBS Group Research.
In an Aug 3 report, the analysts deem the deal to be a value-accretive one for SPH and “bolt-on acquisition” for Keppel.
“SPH seems to be a rare synergistic good fit to Keppel. Management emphasised that SPH’s quality portfolio is strongly aligned with Keppel’s. For instance, PBSA, senior living, stakes in SPH REIT, and its REIT manager strengthen Keppel’s focus areas in Urban Development, Connectivity, and Asset Management,” writes the team.
“The acquisition will also allow Keppel to consolidate its existing ownership of the M1 and Genting Lane data centre asset that are currently jointly owned with SPH,” it adds.
At the same time, the acquisition should be a comfortable one for Keppel, as “we do not see the group stretching its financials (gearing should be marginally higher than 0.85 times post the deal),” says the team.
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In the meantime, “expected earnings per share (EPS) growth of 6% and an 18% boost to Keppel’s recurring income will be seen as a positive.”
In addition, Keppel should be able to get its investment back through further strategic actions through the monetisation of SPH’s non-media assets such as its purpose-built student accommodation (PBSA) and senior living portfolio.
Based on the team’s estimated revised net asset value (RNAV) of SPH at $2.40 per share, the analysts have estimated a 25 cent accretion to its RNAV for Keppel.
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To this end, they have kept “buy” on the latter with a target price of $6.20.
The offer to SPH shareholders at $2.09 per share is also deemed attractive by the team.
“At 1.0 times price-to-net asset value (P/NAV) and [around] 13% below our RNAV of $2.39/share, we recommend that investors accept the offer.”
“With an estimated two-thirds of the offer price in the form of consideration units for SPH REIT and Keppel REIT, we do not see this as a total exit for investors,” they add.
The acquisition is seen as a win-win for investors who may be able to realise partial value in SPH and are still able to “ride the growth” of SPH REIT’s anchor asset, Paragon.
Through Keppel REIT, investors can ride the longer-term growth in terms of capital value in its prime assets in the Central Business District (CBD), note the analysts.
“With expected boost in liquidity for both S-REITs post transaction, we see compression in their headline yields of 5.0%”, they write.
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Another merger coming up?
With the merger of the parent companies, the team at DBS believes that there may be a potential merger between Keppel REIT and SPH REIT.
To be sure, a merger between both REITs will “make sense on many fronts for investors”. When combined, both REITs will form the sixth largest Singapore REIT (S-REIT) at $6.9 billion in terms of market cap. The merger is also likely to drive liquidity into the stock.
The move will overtake Frasers Logistics and Commercial Trust’s (FLCT) position that’s currently at sixth place among the S-REITs and will move the largest REIT under Keppel Corp closer to its peer, Mapletree Commercial Trust (MCT).
That said, it hopes that both entities are given room to “try and grow on their own”.
The team adds that “sometimes in the pursuit of scale, we neglect the uniqueness (in terms of exposure, growth, and cyclicality to the economic cycle) of both S-REITs if left on their own”.
It has maintained “buy” on both Keppel REIT and SPH REIT, with an unchanged target price of $1.40 for the former and a raised target price of 92 cents from 80 cents previously for the latter.
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The team’s target prices for both REITs is pegged to Keppel Corp’s implied offer price for SPH.
As at 1.08pm, shares in SPH are trading flat at $1.92 while shares in Keppel Corp are trading 9 cents higher or 1.7% up at $5.54.
Units in SPH REIT are trading 0.5 cent higher or 0.6% up at 89.5 cents while units in Keppel REIT are trading flat at $1.13.
