The proposal to merge with Keppel Offshore & Marine was officially approved by 95.28% of Sembcorp Marine's shareholders yesterday!
Following this EGM, Keppel Offshore & Marine (excluding legacy rig assets and related receivables in Asset Co) will be integrated into Sembcorp Marine (SMM), with Sembcorp Marine owning a 46% share. The remaining 54% share will be held by Keppel Corporation, which will transfer 49% of the stake to its shareholders through a distributing-in-specie (DIS) mechanism in a ratio of 19:1 Sembcorp Marine shares, with each share having an implied value of S$2.32 per Keppel Corporation share if we used 1x PB for SMM.
The ex-distribution date of the DIS will be on 23 Feb 2023, with the book closure taking place on 24 Feb. Shareholders will receive their entitlement on 1 Mar after being credited.
Is there a potential mispricing for Keppel Corp?
Keppel Corp’s share price will most likely trade down by the DIS amount, leading to an ex-DIS price of around $4.80 - $5 if the share price remains at approximately $7.13. This would value Keppel Corp at 0.7x its book value, which is significantly lower than the 7-year average price-to-book multiple of 1x. Additionally, the ex-DIS dividend yield for Keppel Corporation is anticipated to be higher than 6.6%, based on the $0.33 dividend per share, which is considerably greater than the average dividend yield of 3.3% since FY16.
Stable recurring income
Between 2017 and FY22, Keppel Corporation's recurring income increased from S$307m, accounting for 38% of its profit, to S$560m, which represented 60% of its profit, with growth largely attributable to its infrastructure unit. In 2H22, the unit contributed S$218m, accounting for 55% of KEP's recurring income and reflecting a 40% h-o-h increase. It is expected that Keppel's power spread in Singapore will remain relatively healthy in 2023F, as its capacity has already been contracted for 2-3 years since 2022.
While the quantum of recurring income from infrastructure may decrease y-o-y in 2023F, Keppel is expected to actively participate in building its recurring income base by investing in sustainable energy infrastructure, driven by energy security considerations. In FY22, REITs and asset management accounted for 27% and 15% of its recurring income, respectively, with net AM fee income increasing by 21% due to growth in assets under management and more acquisitions/divestments.
Conclusion: Potential re-rating
When CapitaLand divested its property development arm to Temasek, the share price re-rated upwards as the company transformed to a fee-income asset management model. So I am rather hopeful that the same thing will happen to Keppel Corp as it transit to a higher ROE business model with higher recurring income!
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