Keppel Corp
Price target:
PhillipCapital “buy” $7.07
Of progress, and delays
PhillipCapital analyst Terence Chua has kept a “buy” rating on Keppel Corp with an unchanged target price of $7.07, following a series of updates from the company on multiple fronts.
Earlier on March 31, Keppel Corp and Sembcorp Marine (SembMarine) said they have made “significant progress” on advancing the proposed combination of Keppel Offshore &
Marine (Keppel O&M) unit with SembMarine.
However, the two companies said more time and deliberation will be required to complete the due diligence to reach a mutual agreement and will update again a month later.
Despite the delay of the proposed combination, Chua continues to stay positive on Keppel, and believes that a definitive agreement will emerge very soon. However, there are likely risks if the deal takes too long to sew up and the world economy worsens.
On the same day, Keppel announced the sale of its loss-making logistics business to Geodis International for $80 million, which values Keppel Logistics at an enterprise value of $150 million on a cash free and debt free basis.
The sale is part of a series of divestments Keppel is making, including “sub-scale” businesses, to help reach its return on equity target of 15%.
Chua believes that Keppel T&T, the unit that holds the logistics business, will now re-channel its capital to focus more on data centres and subsea cable systems.
Chua also notes that Keppel has made significant progress advancing the sale of its 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 company) that would be majority owned by external investors.
The asset company 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 company is therefore also expected to be reduced over time, as the rigs or asset company are sold or securitised when conditions in the rig chartering market improve.
On the whole, Chua is positive on Keppel as the outlook of the industry is also improving, underpinned by firmer oil prices. “With the overhang removed, along with the divestment of its logistics unit, we believe Keppel will be re-rated,” he adds. —