Synergies in Keppel's SPH buyout win analysts' favour

IT appears Keppel Corp can do little wrong these days.

In what has turned out to be an event-loaded year for the diversified firm, Keppel has once again won the favour of analysts, this time with its proposed S$2.24 billion privatisation bid of Singapore Press Holdings (SPH) - sans the media business - that was disclosed on Monday morning.

CGS-CIMB Securities analyst Lim Siew Khee favoured the deal given the visible synergies for Keppel and that given its larger size, it is able to expedite monetising the selected assets in SPH's "quality portfolio" in an easier fashion.

United First Partners' head of Asian research Justin Tang said: "With this proposed acquisition and previous announcements, Keppel will be freed from the underperforming O&M business, consolidate its ownership in M1, keep a distance from the loss-making SPH Media, obtain additional property development exposure, as well as a 20 per cent stake in SPH Reit".

"All the previous corporate manoeuvres by Temasek (Holdings) presages the anointing of Keppel as national champion," he added.

The largest assets set to be acquired are SPH's purpose-built student accommodation (PBSA) portfolio worth S$1.4 billion and its S$1.1 billion worth of non-REIT property holdings, said UBS analysts Cheryl Lee and Rachael Tan.

'We believe the upside to Keppel Corp shareholders stems from Keppel's plans to enhance assets where necessary, and monetise the assets, via its asset management platform, Keppel Capital. We note that Keppel Capital has a strong proven track record on this front," they noted.

A key question is post divestment of Keppel's offshore & marine business, could it end up as "just a property-focused company".

"To this point, Keppel emphasised that its monetisation plans continue and that it had sufficient debt headroom to allocate capital into significant deals in non-property segments, eg renewables and connectivity," said the analysts.

One sweet prospect of the deal for Keppel is SPH's PBSA assets. "Even with Covid-19 and travel restrictions, these student accommodation centres are still 90 per cent filled. There's a lot of upside potential for these assets.In a recovery scenario, these assets could potentially generate even more value for Keppel in the future," said Philips Securities analyst Terence Chua.

The news had taken analysts by surprise. While KEP's deployment of cash from divestments into new business lines such as renewable energy had been telegraphed to the market, a large-scale acquisition of a more traditional property business and technology platform companies (such as those owned by SPH) was outside base case, particularly as KEP was simultaneously selling down assets from its real estate arm, Keppel Land Ltd in a bid to lighten up its balance sheet.

"We think the acquisition was somewhat opportunistic for KEP, especially post recent corporate actions at SPH," said OCBC Credit Research.

The house reckoned that SPH ex-media had appealed to Keppel mainly due to SPH's student accommodation and retirement villages which are likely to be synergistic with the conglomerate's asset management business that focuses on private funds.

SPH also has sizeable stakes in technology platform assets including sgCarMart, iFast, Carousell and Coupang which KEP is buying as part of the deal. "These are quality assets which may contribute to Keppel's bottom line though it remains to be seen how fast Keppel can monetise them," said OCBC.

Keppel has said it will fund the SPH buyout under a scheme of arrangement via S$1.08 billion cash through various sources including internal cash and borrowings and the remaining with units of Keppel Reit.

Under a scheme of arrangement, Keppel's wholly-owned Keppel Pegasus is offering S$2.099 a piece for SPH shares. SPH shareholders will receive cash of 66.8 Singapore cents and 0.596 Keppel Reit units from the offeror. They will also receive 0.782 SPH Reit units per share from SPH.

Keppel Reit's sponsor is Keppel Land which is wholly owned by Keppel. Post the transaction, sponsor will hold a significantly lower stake of around 20 per cent in the Reit versus around 46 per cent currently.

Citi Research expects the potential reduced stake in the Reit to be a near-term share-price overhang until December - the date of the scheme - although it also expects the significantly improved free float to be a plus point.

This, the house said, could serve as a medium-term positive as an expanded free float of some 80 per cent makes it the seventh largest S-Reit by free float market capitalisation and could increase its chances of being admitted into the Straits Times Index. Keppel Reit is second on the STI Reserve List after Suntec Reit.

A long-term consideration could revolve around the addition of SPH Reit into Keppel's stable of Reits/business trusts - it will have six post this transaction - given that other major sponsors, namely CapitaLand and Mapletree Investments (MIPL), already have the majority of their income-producing retail and office assets in single commercial Reits.

It's been a restructuring packed year for both firms. Keppel, 20 per cent owned by Temasek Holdings, began the year with a radical revamp with its plans to ditch its traditional rigs business as it leans on the booming clean energy business to hunt for better growth. Then, a month ago, it said it was in talks with sector peer Sembcorp Marine to merge their gargantuan offshore & marine businesses as the sector continues to face headwinds amid oil's doldrums.

Not to be outdone as far as 2021 corporate reboots go, following a strategic review, SPH unveiled a plan in May to carve out its media business into a company limited by guarantee (CLG). SPH owns and publishes The Business Times, which will be part of the proposed CLG.

Keppel's bid for SPH is subject to the divestment of the media business, a deal which SPH shareholders are set to vote on within the next month or so.

Expect the 11.6 per cent premium to narrow significantly once the stocks open for trading, remarked Brian Freitas, an analyst who publishes on Smartkarma. "Arbs will look to get involved by buying SPH and selling Keppel Reit and SPH Reit," he said, adding there will be passive selling on SPH Reit (SPHREIT SP) due to the FTSE All-World trackers needing to sell the stock.

All the stocks involved are currently on a trading halt.