Hot stock: Keppel Reit down 5% at open, Keppel Corp rises after proposed SPH deal

KEPPEL Reit units fell at the open while Keppel Corp started the day higher after resuming trading on Tuesday. The latter on Monday announced a surprise bid to take media and property group Singapore Press Holdings (SPH) private.

Keppel Reit dropped 5 per cent or S$0.06 to S$1.14 when the market opened. Keppel Corp, however, opened 0.6 per cent or S$0.03 higher at S$5.52 as at 9.02am.

Keppel Reit was also the third most traded counter by volume as at 9.13am, with 5.2 million units changing hands. The counter was down 4.2 per cent or S$0.05 to S$1.15 by then. 

Both counters were in negative territory by the end of the morning trading session. Keppel Corp reached a low of S$5.39, down 1.8 per cent or S$0.10 as at 11.10am, while Keppel Reit hit a low of S$1.13, declining 5.8 per cent or S$0.07. 

As at the midday trading break, Keppel Corp was down 1.1 per cent or S$0.06 to S$5.43, while Keppel Reit was still trading at its lowest. 

Keppel's proposed privatisation deal values SPH at S$3.4 billion with Keppel's share of the deal totalling S$2.2 billion. If approved, Keppel's stake in Keppel Reit would fall, but Keppel would end up with indirect ownership of 20 per cent of SPH Reit.

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As at Aug 31, 2020, SPH Reit's portfolio comprised five commercial properties in Singapore and Australia - Paragon, Clementi Mall and The Rail Mall, Figtree Grove Shopping Centre and Westfield Marion Shopping Centre.

SPH also owns and operates The Seletar Mall, and holds a 50 per cent stake in two joint-venture companies developing an integrated development comprising The Woodleigh Residences and The Woodleigh Mall.

Under the purpose-built student accommodation (PBSA) segment, SPH operates two brands - Student Castle and Capitol Students - with a presence in both the UK and Germany. It also has assets in the aged care sector in Singapore and Japan.

Outside of property, SPH has interests in a MICE business, South Korean e-commerce company Coupang, online trading platform iFast Corporation and car marketplace sgCarMart.

OCBC Investment Research noted that the valuations offered by Keppel are "fair" and while "not a steal", there are synergies with the conglomerate's businesses, namely urban development, connectivity and asset management. 

"With highly complementary businesses, we see SPH to be a value-accretive deal and bolt-on acquisition for Keppel," said DBS analysts Ho Pei Hwa and Rachel Tan.

Keppel can also look to enhance the assets before monetising them, said analysts from OCBC Investment Research, DBS Group Research and CGS-CIMB. DBS noted that a number of SPH's assets - its PBSA segment, Seletar Mall and Woodleigh Mall - will be "ready for monetisation" within the next three years.

The listing of the PBSA is also on the cards, said CGS-CIMB analyst Lim Siew Khee. The asset is valued at S$1.4 billion, with the UK investment seeing yields of 4-6 per cent. This comes as the pace of booking for SPH's PBSA segment remains healthy, with more than 90 per cent occupancy. 

Potential merger of Keppel Reit and SPH Reit?

Both DBS and CGS-CIMB are not ruling out the potential merger of Keppel Reit and SPH Reit, which may result in the formation of the sixth-largest Singapore real estate investment trust (Reit) with an estimated S$6.9 billion market capitalisation.

However, DBS hopes that both entities are given the opportunity and runway to grow on their own. 

"Sometimes in the pursuit of scale, we neglect the uniqueness (in terms of exposure, growth, and cyclicality to the economic cycle) of both S-Reits if left on their own," the DBS research team said. 

DBS has a "buy" call on Keppel Corporation, with a target price of S$6.20. It maintains its "buy" call on Keppel Reit, with a target price of S$1.40. 

OCBC Investment Research rates Keppel Corp a "buy" as at Monday with a fair value of S$6.33, while CGS-CIMB has an unchanged "add" call with a target price of S$6.90.

READ MORE:

• Synergies in Keppel's SPH buyout win analysts' favour

• Offer to privatise SPH's non-media assets reasonable, say analysts

• Hot stock: SPH and SPH Reit shares mixed on privatisation offer from Keppel

• The SPH Journey: A timeline of key events since SGX listing

• BT Explains: Keppel's bid to take SPH private

• Landmark S$3.4b deal paves way for SPH restructuring, enlarges Keppel's footprint