The engineering, procurement and construction (EPC) contracts for six oil drilling rigs will be amicably terminated with no penalties or refunds due to any party.
“We believe this will work favourably for the group as it simplifies the process of selling its legacy rigs and associated receivables to a separate Asset Co that will be formed under the non-binding MOU signed in June this year,” he writes in an Oct 19 report.
“Under the memorandum of understanding (MOU) entered between Keppel and Kyanite Investment Holdings (Kyanite), a wholly owned subsidiary of Temasek, the deal if materialised, will see external investors own a majority stake in Asset Co,” he adds.
Chua’s positive recommendation on the group also comes as its subsidiary M1 signed agreements with Keppel DC REIT on Oct 14.
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See also: Keppel DC REIT announces details of NetCo partnership with M1
Under the agreement, Keppel DC REIT will invest into M1 Network (NetCo), which will own M1’s mobile, fixed and fibre assets.
The proposed investment is said to be accretive to the REIT’s distribution per unit (DPU).
Upon completion, M1 will receive a consideration of $580 million, or the net book value of the mobile, fixed and fibre assets.
“With the latest transaction, we believe Keppel is on track to hit the higher bound and even exceed the $3 billion to $5 billion divestment target before [Keppel’s] FY2023 target,” he says.
“We believe Keppel is expected to surpass $3 billion in asset monetisation well ahead of its three-year schedule,” he adds.
So far, Keppel Corp has announced the monetisation of over $2.3 billion in assets from October 2020 to July and have completed about half of the transaction already.
Looking ahead, Chua believes Keppel is “well-positioned” to enhance and unlock the value of Singapore Press Holdings’ (SPH) portfolio.
“The two companies are already partners in businesses such as M1, Prime US REIT and the development of the data centre at Genting Lane in Singapore. We expect the acquisition to streamline decision-making, operational control and allow the group to reap synergies,” writes Chua.
In addition, he expects to see some form of agreement between Keppel Offshore & Marine (Keppel O&M) and Sembcorp Marine (SembMarine) in the 4QFY2021.
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“While nothing has been firmed up, we view the discussions 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,” he says.
“The proposed transactions are expected to be earnings-accretive for Keppel in the current financial year on a pro-forma basis, although there is no guarantee of completion by this year. The group’s net debt should fall as a result of the deconsolidation of Keppel O&M and receipt of part of the consideration from the merged entity,” he adds. “Distribution in specie of the merged entity will, however, reduce Keppel’s shareholders’ funds. Overall, net gearing is not expected to be much affected by the transactions.”
To this end, Chua has raised his target price estimate to $7.07 from $6.28 as he includes Keppel Capital in his model as “it has gained in significance to warrant a value assigned to it”.
In his calculations, Chua has valued the group based on the four new segments it unveiled during its Vision 2030.
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Chua has kept Keppel’s O&M division at 0.8 times book value. He has lowered Keppel Infrastructure Holdings’ valuation at 10 times FY2022 earnings from 12 times previously.
Its Urban Development segment’s valuation remains unchanged at a 40% discount on Keppel Land’s revised net asset value (RNAV) and 1.5 times book value of Sino-Singapore Tianjian Eco-City.
Within the Connectivity segment, Chua lowered his value on M1 at 9 times FY2022 earnings, from 12 times previously.
In Asset Management, Keppel Capital is valued at 10 times FY2022 earnings, representing a slight discount to its peers.
“We have however, raised our holding-company discount to 20% as we have turned doubtful on the group’s ability to integrate all its different business units together.”
Shares in Keppel closed 4 cents lower or 0.73% down at $5.46 on Oct 21.
Photo: Keppel
