As Keppel comes out tops in its long-awaited merger with Sembcorp Marine, analysts recommend investors “buy” Keppel Corporation and “sell” the latter.
In an April 28 note, OCBC Investment Research has a “sell” call on SembMarine with a target price of 11 cents. OCBC Investment Research also has a “buy” call on Keppel Corporation with a target price of $8.78.
Keppel Corporation has been an outperformer so far this year, says OCBC Investment Research. “Since the start of the year, the share price of Keppel Corporation has appreciated by about 30% (based on the closing price of $6.66 on April 26), significantly outperforming the broader Straits Times Index.”
They add: “Besides the strong earnings announcement for the financial year to end-Dec 2021 (FY2021), during which the group reported net profit of $1.02 billion, the highest achieved in the past six years since the O&M downturn, the sector has been buoyed by better industry fundamentals.”
Keppel and Sembcorp Marine have signed definitive agreements for the proposed combination of Keppel offshore and marine (O&M) and SembMarine. The combined entity will be consolidated with the restructured Keppel O&M through a separate scheme of arrangement of Keppel O&M.
Following this, Keppel O&M and SembMarine will become wholly-owned subsidiaries of the combined entity. Concurrently, Keppel O&M will sell its legacy rigs and associated receivables to an asset company that will be 10%-owned by Keppel and 90%-owned by other investors, and transfer other out-of-scope assets to Keppel.
See also: 'Add' Keppel, the accretive winner in O&M, SembMarine merger: CGS-CIMB
Keppel and its shareholders would then own 56% of the combined entity and SembMarine shareholders would own 44% on completion. This takes into account the respective capital structures of the two companies, and the $500 million cash that Keppel O&M will pay to Keppel and other adjustments.
Keppel will then distribute in-specie 46% of the combined entity shares to Keppel’s shareholders and retain a 10% stake, which will be placed in a segregated account. Following this distribution-in-specie, Temasek will hold 33.5% and be the largest shareholder of the combined entity.
Besides regulatory approvals, the proposed combination will also be subject to the approvals of the shareholders of Keppel and Sembcorp Marine at separate EGMs, which are expected to be convened in 4Q2022.
See also: Keppel Corp signs definitive agreements with SembMarine for proposed merger with Keppel O&M
The combined, listed entity will adopt a new name, Bayberry Ltd, to reflect its focus on offshore renewables, new energy and cleaner solutions in the O&M sector.
What to look out for
PhillipCapital senior research analyst Terence Chua is also maintaining his “buy” call on Keppel Corporation, with a lower target price of $7.07.
“While the recent developments have been positive, we have opted to keep our target price unchanged until the relevant regulatory and shareholders approval have been obtained. We valued the group based on the four new segments unveiled during Vision 2030 to better reflect the group’s reporting segments going forward,” writes Chua in an April 28 note.
The signing of the definitive agreements is a positive first step, but there are a couple of developments Chua will continue to watch closely.
These include regulatory approvals required for the deal, integration plan of the combined entity, outcome of the remaining 10% combined entity shares and Keppel’s plan for the $500 million in cash.
Both Keppel and Sembmarine operate in many jurisdictions, and anti-trust and regulatory approvals will require some time to run through, says Chua.
See also: How will Bayberry trade once it’s listed? Likely lower than $0.122
Chua will be watching for details of the upside synergies expected from the proposed combination, as well as opportunities for Bayberry in the energy transition as well as the recovery in the O&M business.
There is also the outcome of the remaining 10% of the combined entity shares, which will be deposited into a segregated account for certain identified contingent liabilities.
The account will be terminated no later than 48 months from the completion of the proposed combination, or as soon as these contingent liabilities have been dismissed or fully resolved. The balance amount in the account will then be returned to Keppel after making payments to the combined entity, if any.
Last but not least, Chua will watch for how the group chooses to reinvest the proceeds of $500 million in cash.
The proposed transactions, if successful, are expected to be earnings accretive to Keppel for FY2021 on a pro-forma basis, adds Chua.
“Had the proposed transaction been completed on Jan 1, 2021, the earnings per share for FY2021 would have been $0.725 instead of $0.562, excluding the net disposal gain from the proposed transactions,” says Chua.
“Had the proposed transaction and proposed distribution been completed on Dec 31, 2021, the net gearing would have decreased from 0.68x to 0.63x. Had the proposed transactions and proposed distribution been completed on Dec 31, 2021, the net tangible assets per share would have increased to $5.54 from $5.53,” he adds.
As at 9.49am, shares in Keppel Corporation are trading 12 cents higher, or 1.75% up, at $6.98; while shares in Sembcorp Marine are trading 0.1 cents higher, or 0.93% up, at 10.9 cents.
