Tuesday, January 27, 2015

Keppel Corp

Keppel Corp: After a three-day trading halt, spanning its FY14 results, Keppel Corp (KEP) finally cobbled out a two-tier cash offer for its 54.6% owned property arm Keppel Land (KPLD) between $4.38 (base price) and $4.60 (privatisation price), representing 20-26% premium to its last close of $3.65 but at a 7-12% discount to its book value of $4.95. This compares to the 21% premium which CapitaLand paid for CapitaMalls Asia in July last year. KEP has indicated that there will be no chain offer for Keppel REIT and it does not intend to revise the offer prices, which will include the 14¢ dividend declared by KPLD. This is not the first time that KEP is privatising its listed entities. Back in 2001, the group took both Keppel Hitachi Zosen and Keppel FELS private but that was when KEP was a pure holding company with no core operating business and was flushed with cash after the sale of Keppel Bank. The situation is different this time round as we see no compelling case for KEP to lever up its gearing in a transaction that has little strategic value, amid a rising interest rate environment, softening property market and significant headwinds in the O&M industry. KEP has cited positive long term prospects in the property sector, unlocking of value, a more balanced earnings base and ability to leverage the group’s strengths to achieve synergies and higher returns as the key rationale behind the offer. However, there was nothing that had prevented KEP from achieving the same objectives to grow its property arm in the past. In fact, it is for this very reason that KEP is not required to seek shareholder approval given its controlling interest as KPLD constitutes a significant portion of its revenue and earnings. Property business is capital intensive and it is always useful to have additional access to funding. Moreover, the deal structure and manner in which it was executed (three-day trading halt, last minute rescheduling of results briefing, key press release with no letterhead) speaks of a management that is half-hearted and tentative. At its best, the $3.2b transaction is an opportunistic move by KEP to buttress its earnings and plug a potential O&M earnings gap should rig orders dry up. At its worst, KEP will end up with an increased shareholding in KPLD and a much weakened balance sheet to face the oncoming O&M storm. Recall KEP made botched privatisation offer for Keppel T&T in 2001, which resulted in it holding an 80% stake the logistics/telecom operator. Implications of the transaction: 1) The deal would be EPS (+13% to $1.18), ROE (+12% to 21%) and NAV (+4% to $5.94) accretive, but these are bought through debt 2) KEP will be able to book a negative goodwill gain of $245.5m (100% privatisation) or up to $311.8m (assuming 89.9% acceptance level) in FY15 3) Net gearing will rise from 0.11x to 0.41x 4) Less transparency for its property division and more diversified portfolio will widen its conglomerate discount 5) Less support for its share buyback following the expected cash drain. The group kicked off its share buyback scheme last year and has since purchased back 5.5m shares Perhaps the bigger question that shareholders might want to ask is whether there will be a shift in KEP’s focus from building businesses, which the previous management has so painstakingly built up over the years, to an asset management model, banked on financial engineering and deal making. Time will quickly tell. Latest broker ratings: Maybank-KE maintains Hold with TP of $8.60 CLSA maintains Sell, cuts TP to $6.60 from $7.85 Morgan Stanley maintains Equal-Weight but cuts TP to $7.80 from $9.60 Nomura maintains Reduce with TP of $7.95 Goldman Sachs maintains Neutral with TP of $8.60 Deutsche maintains Neutral with TP of $8.80 JPMorgan maintains Neutral with TP of $8.80 OCBC maintains Buy but cuts TP to $9.14 from $9.89 CIMB maintains Add but cuts TP to $9.31 from $9.90 Credit Suisse maintains Outperform but cuts TP to $10.00 from $12.50 Barclays maintains Overweight but cuts TP to $11.30 from $11.70

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