SINGAPORE (July 21): DBS Vickers Securities says the possibility of M&A between Keppel Corporation and Sembcorp Industries (SCI) has resurfaced, prompted by prevailing challenges in the O&M sector and recent changes in the leaderships of both groups.

In a Thursday report, analysts Ho Pei Hwa and Janice Chua detail three scenarios.

Firstly, both groups’ units Keppel Offshore & Marine (O&M) and Sembmarine (SMM) could combine their core competencies and facilities to strengthen their franchise and thus, create room for further cost rationalisation, say Ho and Chua.

SCI could also enhance its shareholder value by focusing on its core competency along the utilities value chain, while divesting SMM to Keppel Corp, Temasek Holdings or ST Engineering.

Alternatively, Keppel Corp could remain as a conglomerate, but swap its $1.3 billion worth of infrastructure assets for SCI’s interest in SMM.

The research house has upgraded its rating on Keppel Corporation from “hold” to “buy” while raising its price target to $2.30 from $1.78 previously, highlighting the stock as one to tap on the re-rating of Singapore’s property sector in the near term.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='/capital/brokers-calls/keppel-corporations-acquisition-aermont-capital-checks-all-boxes?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>Keppel Corporation’s acquisition of Aermont Capital ‘checks all boxes’</a>

It also reiterates its “buy” calls on Sembcorp Industries (SCI) and SMM at target prices of $4.10 and $2.30 respectively. Ho and Chua believe that while the former could emerge as a “clear winner” with the potential rerating of its utilities business, SMM benefits as a pure play to ride on a sector recovery.

“Share prices have formed a base and we advocate positioning into these stocks, on potential M&A, better order flow as shipyards are diversifying into non-drilling and LNG projects and, trade on oil price recovery,” say the analysts.

As at 9:57am, shares in Keppel Corp, SCI and SMM are trading at $6.53, $3.27 and $1.76 respectively.

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