KGI: Bids for Keppel T&T and M1 are net positives for Keppel

M1 retail outlet at Orchard Road In SingaporeM1 retail outlet at Orchard Road In Singapore

The planned deals for M1 and Keppel Telecommunications & Transportation are net positives for Keppel Corp. as they are immediately accretive to earnings per share, KGI said in a note on Thursday.

It would also only increase Keppel’s net gearing to between 0.49 times and 0.62 times, assuming it has 100 percent of M1’s shares at the close of the offer, which is still “comfortably below” the more than 1.0 times gearing of the company’s peers, KGI said.

Keppel Corp. and SPH announced that, via a special purpose vehicle called Konnectivity, they planned to make an offer for all of M1 at S$2.06 a share. The offer price is a premium of 26 percent to M1’s last traded price of S$1.63 on Friday of last week.

Konnectivity has a deemed interest of 33.27 percent of M1, the filing said, with Keppel T&T, which is 79 percent owned by Keppel, owning 19.2 percent, while SPH has a 13.45 percent stake held via wholly owned subsidiary SPH Multimedia.

In a separate deal, Keppel proposed taking Keppel T&T private at S$1.91 a share, it said in a filing to SGX on Thursday. The stock last traded at S$1.36 on Friday of last week before being halted, indicating a 40 percent premium in the offer price.

KGI said that it expected shareholders of M1 and Keppel T&T would most likely accept the offers, and if the deals are successful, Keppel would recognize EPS accretion in the second quarter of 2019.

It added that while the M1 offer was for all of the telco’s shares, it could still go through if Konnectivity receives more than 50 percent of the shares.

“We believe that Keppel is primarily looking to take a controlling stake in M1 to drive change in the company. That would mean that Keppel’s
management would be content to have the minimum stake of 50 percent and one share to gain control over M1, and would prefer to keep M1 as a listed entity,” KGI said.

KGI also noted that for M1 shareholders, the deal represented a good exit opportunity.

“Plans that Keppel has for M1 may only bear fruit in the medium and long-term. We also think there is the risk that dividends may be
reduced at M1 in the event that Keppel takes a controlling stake as cash flows are redirected to transform the business,” KGI said.

But it added that if M1’s other major shareholder Axiata rejects the offer and launches a higher counter bid, it would still give M1 and Keppel a win-win outcome.

It kept Keppel at Buy with a S$9.43 target price.

“Keppel is an attractive long-term growth story, especially now that it is more active in M&A deals to leverage on its strong balance sheet,” KGI said. “We believe valuations are cheap and investors should use the recent share price weakness to accumulate shares.”

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