PhillipCapital Group Research analyst Terence Chua has kept a “buy” rating on Keppel Corporation with an unchanged target price of $7.07.
Earlier on March 31, Keppel Corporation and Sembcorp Marine (SembMarine) announced that they have made “significant progress” on advancing the proposed combination of Keppel Offshore & Marine (Keppel O&M) and SembMarine.
The progress involves mutual due diligence, the transaction structure, exchange ratio and other related matters.
However, more time and deliberation will be required to complete the due diligence to reach a mutual agreement, says Keppel Corp and SembMarine in a joint statement.
See: Keppel Corp and SembMarine to work towards 'definitive agreement' by April 30
In addition, Keppel Telecommunication & Transportation Limited (Keppel T&T) has entered into an agreement for the divestment of its entire stake in Keppel Logistics to Geodis International SAS (GEODIS) for a cash consideration of approximately $80 million. This values Keppel Logistics at an enterprise value of $150 million on a cash free and debt free basis. As such, Chua expects the divestment to improve Keppel’s ability to meet its return on equity (ROE) target of 15%.
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According to the analyst, Keppel Logistics’ entities divested to GEODIS registered a net loss after tax of $5.2 million for FY2021 ended December 2021. As its non-core business has been operating at a sub-scale level, its divestment is in line with its Vision 2030 plans to simplify and focus its business, as well as enhancing its earnings.
“We believe that Keppel T&T’s priority will now be to scale up in its focus areas of sustainable data centre solutions and subsea cable systems,” says Chua, as the capital unlocked from this transaction will be used to fund its new growth initiatives.
The transaction includes Keppel Logistics' businesses in Singapore, Malaysia and Australia, as well as UrbanFox.
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The analyst has also noted that significant progress has been made on advancing the sale of Keppel Offshore and Marine’s (Keppel O&M) legacy rigs and associated receivables. This is in light of how Keppel had previously announced that it will be transferring its legacy completed and uncompleted rigs and associated receivables to a separate company (Asset Co) that would be majority owned by external investors.
The Asset Co transaction and the proposed combination between Keppel O&M and SembMarine will be inter-conditional and are being pursued concurrently.
“Should the proposed transaction be successfully completed, external investors will provide capital for completing these uncompleted rigs, which would reduce Keppel’s capital requirement,” explains Chua.
Keppel’s economic exposure in Asset Co is therefore also expected to be reduced over time, as the rigs or Asset Co are sold or securitised when conditions in the rig chartering market improve.
Despite the second delay of the aforementioned proposed combination however, Chua continues to stay positive on Keppel, and believes that a definitive agreement will emerge very soon.
Some risks the analyst considers include a continued prolonged resolution for Keppel O&M and a worsening global economy.
On a whole, the analyst is positive on Keppel as the outlook of the industry is also improving, underpinned by firmer oil prices. “We expect Keppel O&M legacy rigs to be substantially monetised in the next three to five years on the back of the improving industry outlook,” says 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 divestment of its logistics unit, we believe Keppel will be re-rated,” he adds.
Shares in Keppel closed at $6.47 at an FY2022 P/B ratio of 0.9x and dividend yield of 4.5% on Apr 4.
