CGS-CIMB Research analyst Lim Siew Khee is staying “overweight” on Singapore’s offshore and marine sector, as the Keppel Offshore and Marine (Keppel O&M) and Sembcorp Marine (SembMarine) merger is confirmed.
Lim estimates Keppel Corporation’s (Keppel Corp) share price accretion post dividend-in-specie from the proposed merger of Keppel O&M and SembMarine to range from 48 cents to $1.43.
“The above takes into account a range of dividend-in-specie in the new combined entity, Bayberry, of between $1.28 and $2.22 per share,” writes Lim in an April 27 note.
The deal, which is set to be completed by end-2022, favours Keppel Corporation more than SembMarine, says Lim. SembMarine’s restructuring into a mega yard for growth could take time, she adds.
On this, Lim is recommending investors “add” Keppel Corporation, with a target price of $7.20, and “hold” SembMarine, with a target price of 9 cents. “We see temporary share price pressure on SembMarine as it could trade at an implied combined entity 1x P/BV, or 7 cents, as it could take time to restructure for growth and back to profitability.”
She adds: “The estimated net loss for the combined entity is $1.3 billion for FY2021 on a proforma basis.”
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Keppel O&M, excluding its out-of-scope assets, such as Floatel and Dyna-Mac, and Asset Co, which includes Keppel O&M’s legacy rigs and associated receivables, will merge with SembMarine to form the combined entity Bayberry Ltd, a listed entity in Singapore.
Bayberry will focus on offshore renewables, new energy, and cleaner O&M solutions. “This is a long-awaited deal that should result in synergies between Keppel O&M and SembMarine to expand their track records and capabilities, as well as orderbook to $6.4 billion,” writes Lim.
Keppel Corp will receive a 56% equity interest in Bayberry, of which 46% will be distributed in-specie to Keppel Corp shareholders and the remaining 10% retained in a segregated account for certain identified contingent liabilities (specified events that Keppel Corp could be liable for) for up to 48 months from transaction completion.
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Keppel Corp also receives $500 million cash from Keppel O&M.
Keppel O&M shares will be issued at 12.2 cents per share based on the 10-day trading volume-weighted average price as of April 26 of SembMarine.
The total consideration amounts to $5.374 billion. SembMarine shareholders will receive the remaining 44% stake in Bayberry.
Keppel Corp will enter into an agreement with Kyanite, an indirect wholly-owned subsidiary of Temasek and Baluran Ltd for the sale of Keppel O&M’s legacy rigs and associated receivables to Asset Co.
Fair value of Asset Co is reported to be $4.05 billion at book value. Post-transaction, Keppel Corp will receive a 10% stake in Asset Co, $120 million in perpetual securities (10% coupon rate), and $3.9 billion vendor notes (10 years at 2% coupon rate).
Kyanite and Baluran will own 15.1% and 74.9% of Asset Co respectively.
Following which, Asset Co will enter into a master services agreement with Bayberry, through KOM, for the completion of certain uncompleted rigs and provision of other services.
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What do Keppel Corp's shareholders get?
Given the complexity of the deal, both SembMarine and Keppel Corp management’s valuations of the final consideration and stakes are based on DCF and value-in-use methodology.
“We estimate the valuation ascribed for Keppel O&M at 3.8x (based on 12.2 cents per Bayberry share) compared to SembMarine’s approximately 1x P/BV prior to the announcement. We estimate Keppel Corp’s share price accretion post dividend-in-specie from the proposed merger of Keppel O&M and SembMarine to range from 48 cents to $1.43, depending on Bayberry’s trading price,” writes Lim.
Lim prefers Keppel Corp in this as the efforts to monetise have come into fruition with room to expand into other growth areas. SembMarine’s share price could retrace to reflect the potential book value of Bayberry, which is 7 cents.
As at 11.11am, shares in Keppel Corporation are trading 11 cents higher, or 1.65% up, at $6.77; while shares in Sembcorp Marine are trading 1.6 cents lower, or 12.2% down, at 11.5 cents.
