UBS: Market focused on Keppel restructuring scenarios

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Temasek’s bid to increase its stake in Keppel Corp. will push the market to focus on multiple restructuring scenarios, UBS said in a note Monday.

“While Temasek stated it does not intend to delist Keppel, the rationale for the move potentially points to more restructuring ahead for the Keppel and, in our view, Sembcorp group of companies,” UBS said, pointing to the state-owned investment company’s plan for a strategic review of Keppel.

Temasek said Monday it is making a bid to increase its stake in Keppel to 51 percent for S$7.35 a share in a more than S$4 billion deal.

UBS noted it has previously stated the conditions for restructuring Keppel and Sembcorp Industries “appear conducive” amid weak earnings trends.

“Keppel and Sembcorp Industries (SCI) are trading at low valuations; Cost synergies can be reaped, particularly in Offshore & Marine,” UBS said.

The investment bank pointed to three potential scenarios for market debate:

  1. Merging Sembcorp Industries and Keppel
  2. Taking Keppel’s offshore and marine division private or merging it with Sembcorp Marine, or
  3. Crystalisation of Sembcorp Industries’ sum of parts valuation.

UBS said Temasek’s offer for Keppel is a 25 percent discount to its sum-of-the-parts valuation of S$9.72 for the company, and 6 percent below the bank’s price target of S$7.80; it rates the stock at Buy.

“Prior to this announcement, Keppel traded at a 40 percent discount to its sum of parts. SCI similarly trades at a deep 49 percent
discount to its net asset value of S$4.05, imputing Sembcorp Marine at market prices. We have Buy ratings on Keppel and SCI and a Neutral rating on Sembcorp Marine,” UBS said.

Temasek’s bid to increase its Keppel stake is conditional receiving enough acceptances to result in it having a 51 percent stake and upon the approval of independent shareholders as well as upon regulators’ approval, the filing said. The offer is also conditional upon Keppel’s financial performance not deteriorating materially in the interim.

Keppel’s earnings disappointed some analysts. Last week, Keppel reported its third quarter net profit dropped 30 percent on-year to S$159 million, mainly on year-ago gains from divesting a commercial development in Beijing and higher net interest expense.

Shares of Keppel ended Tuesday up 14.38 percent at S$6.68. Sembcorp Industries’ shares ended down 2.62 percent at S$2.23 after jumping more than 10 percent on Monday. Sembcorp Marine shares ended up 0.75 percent at S$1.35 after climbing more than 10 percent Monday.

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