Keppel Corporation’s arbitration proceedings against acquisition target Singapore Press Holdings (SPH) may appear contentious, but its impact will be muted, says PhillipCapital Research analyst Terence Chua.
Instead, the arbitration proceedings against SPH will lengthen the overhang on Keppel until a decision is reached. “We expect that Keppel’s stock will remain capped until a final resolution on SPH is announced,” writes Chua.
In a Feb 11 note, Chua is maintaining “buy” on Keppel with an unchanged target price of $7.07.
See: Offers for SPH: The path to $2.36 in cash is clear as Keppel’s long-stop date lapses
On Feb 9, Keppel 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.
See also: Keppel Corp reverses from loss, reports net profit of $1.02 bil in FY2021
To recap, Cuscaden’s offer contains two options. The all-cash option is $2.36 for each SPH share. It beats Keppel's $2.351 offer which is to be paid in a mix of 86.8 cents in cash, 0.782 SPH REIT Units and 0.596 Keppel REIT Units for each SPH share.
If SPH shareholders prefer Cuscaden's $1.602 cash plus 0.782 SPH REIT offer, that is an even higher offer with an illustrative value of $2.400, although since the offer was tabled, this alternative is now valued at $2.361 based on SPH REIT's Feb 9 closing price.
Correspondingly, Keppel's offer is worth $2.318, below SPH's Feb 9 closing price of $2.33.
See also: Keppel Corp announces $500 mil share buyback
Keppel maintains that its offer remains a compelling one, and should be put to SPH’s shareholders for consideration.
Watch for Keppel O&M
Separately, Keppel O&M announced that it has been awarded contracts worth around $250 million.
Chua says: “We are positive on Keppel O&M’s latest contract win that came from repeat customers amid 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.”
The next catalyst investors should look out for is the proposed merger of Keppel O&M and Sembmarine, says Chua. The management is working towards signing definitive agreements by end-1QFY2022. “The outlook of the industry is also improving, underpinned by firmer oil prices.”
“We expect Keppel O&M’s legacy rigs to be substantially monetised in the next three to five years on the back of the improving industry outlook,” writes Chua. “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.”
‘New year goodies’
Meanwhile, KGI Securities analyst Joel Ng says Keppel’s FY2021 ended on an “overwhelmingly positive note”.
“All business segments improved y-o-y in FY2021. The group's FY2021 $1.0 billion net profit was the highest since 2015. Meanwhile, balance sheet strengthened at an accelerated pace, with net gearing improving to 0.68 times as at end-December 2021 from 0.91 times as at end-December 2020. As a reward to shareholders, Keppel raised the final dividend to 21 cents, up from the 7 cents paid out in 2020,” writes Ng.
While KGI Securities held an “outperform” recommendation with a fair value of $6.22 previously, the research house is dropping coverage of Keppel “due to an internal reallocation of resources”.
With a much stronger balance sheet, Keppel will be rewarding shareholders with two ang paos, writes Ng. One is the 21 cents dividend, three times the size of FY2020’s dividend.
The other is a $500 million share buyback programme. These two combined actions will total around $1.1 billion, which the group is spending to improve shareholder returns, writes Ng.
While Keppel’s acquisition plans for SPH remain up in the air, Ng thinks Keppel can do without it as it pursues its Vision 2030 plans.
“The group has laid out a clear strategy that it plans to achieve by 2030, one of which is to grow its recurring income. On this front, Keppel's FY2021 recurring income increased 33% y-o-y to $292 million. The group also remains on track to monetise $5 billion of assets by end-2023, having already collected almost $3 billion in cash since October 2020. Finally, Keppel Capital, the asset management arm, now manages $42 billion in assets under management as at end-2021, which generated $233 million of asset management fees in FY2021,” says Ng.
As at 2.32pm, shares in Keppel are trading flat at $6.03.
