Analysts say Keppel' s share price may not have adequately priced in value of O& M business if deal with Sembmarine is sealed

 

SEMBCORP Marine (Sembmarine) shares plunged while Keppel Corp' s shares climbed on Friday after both companies inked a memorandum of understanding to explore a merger between the former and Keppel Offshore & Marine (Keppel O& M).

 

Sembmarine also announced that it was planning an additional S$1.5 billion rights issue in a bourse filing on Thursday evening.

 

Sembmarine shares, which had closed on Wednesday at 19.1 Singapore cents, fell to 14.4 cents within the first few minutes of trading. They later regained some ground, rising to as much as 15.9 cents, but ended the day at 13.9 cents - down 5.2 cents or 27.23 per cent from Wednesday. It was the most heavily traded stock by both value and volume on Friday, with 997.06 million shares worth S$146.4 million changing hands.

 

Keppel, which had closed Wednesday at S$5.11, reached an intra-day high of S$S$5.44. The counter later closed at S$5.40, up 29 cents or 5.68 per cent.

 

There were no married deals transacted for either companies on Friday, according to ShareInvestor data.

 

The Sembmarine rights issue is heavily discounted at S$0.08 per share - a 35.7 per cent discount to the theoretical ex-rights price and a 58.1 per cent discount to the counter' s Wednesday close. It also comes not long after a S$2.1 billion rights issue last year.

 

The share price decline was therefore expected by several analysts, among them UOB Kay Hian (UOBKH) analyst Adrian Loh.

 

Mr Loh had maintained his " hold" on the counter, pending an analyst briefing, with a fair value of S$0.18.

 

But he also sees potential selling pressure for Sembmarine ahead, depending on how the final deal is structured.

 

If merger talks with Keppel O& M are successful, then Keppel will inject its O& M assets into a combined entity in exchange for a combination of cash and shares in the combined entity. Keppel has said it intends to distribute these shares to its shareholders.

 

This could set up a " similar selling pressure scenario for Sembmarine" as seen post its demerger with Sembcorp Industries in 2020," Mr Loh said. Last year, Sembcorp Industries had separated from Sembmarine by distributing its entire Sembmarine stake to shareholders.

 

OCBC, meanwhile, said a combined entity would be a " stronger player in the global arena" .

 

The brokerage is therefore valuing the stock at a slightly higher price-to-book multiple of 0.8 time, but has kept its " sell" call. On a post-rights basis, OCBC' s target price for Sembmarine is now S$0.09.

 

The research team also expects Sembmarine to continue winning more orders, although it also advised investors to look beyond the group' s headline numbers for the company' s share in a consortium contract and its margins.

 

" Losses are still expected for the group going forward, based on its current order book," the research team said, adding that order wins will still keep the yards utilised and improve the company' s track record in the renewable space.

 

Lim & Tan Securities said in a research note on Friday that it prefers Keppel over Sembmarine. " We have already seen the huge re-rating impact of Sembcorp Industries' share price after it hived off Sembmarine last year, and this latest exercise is the first step for Keppel in that direction," said the brokerage.

 

OCBC, too, is positive on the outlook for Keppel. It has maintained its " buy" call but raised its target price, noting the company' s success with its multi-business strategy to support earnings as the O& M sector suffered.

 

" In terms of ESG (environmental, social and governance) performance, the group fares well in labour management, health and safety, governance and opportunities in clean tech. We update our estimates and also incorporate an ESG premium in our valuations, such that our fair value rises from S$5.50 to S$6.33," the research team said.

 

Meanwhile, some analysts said that Keppel' s share price may not have adequately priced in the value of the O& M business if a deal with Sembmarine is sealed. Furthermore, Keppel is planning to spin-off its rig assets into an entity that will be 80 per cent owned by external investors.

 

UOBKH' s Mr Loh, who has a " buy" on Keppel with a target price of S$6.37, said that he has conservatively valued Keppel O& M at S$100 million. A divestment in excess of this valuation would be accretive to his target price, he added.

 

" Despite the lack of valuation numbers, we view the developments as generally positive given that Keppel will have offloaded a large part of its offshore marine exposure at the end of this process, if it goes through, and moves it closer towards its goal of generating more earnings via recurring income (instead of via order book) and sustainable solutions," Mr Loh noted.

 

DBS Research also said its target, of S$6.20, does not factor in the potential gain from Keppel O& M' s asset sales. DBS has a " buy" on Keppel.

 

Keppel O& M' s assets had earlier been split into three parts: an Operating Company (Op Co) to handle engineering, procurement and construction projects, a Rig Co to own stranded rigs and a Development Co (Dev Co) that will focus on finishing uncompleted rigs.

 

Under the proposal, Op Co will be transferred and combined with Sembmarine. DBS Research estimates the book value of Keppel O& M at S$1.5 billion. But this figure includes non-core investments Floatel and Dyna-Mac, which will be excluded from the deal

 

Rig Co, meanwhile, had a carrying value of S$2.9 billion and outstanding receivables of S$900 million.