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Analysts expect Keppel Corp to monetise SPH's non-core assets; acquisition expected to be EPS accretive

Felicia Tan
Felicia Tan • 5 min read
Analysts expect Keppel Corp to monetise SPH's non-core assets; acquisition expected to be EPS accretive
In addition, ESSEC Business School's associate professor of accounting says the offer may increase the free floats of both REITs.
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Analysts from CGS-CIMB Research, OCBC Investment Research and UOB Kay Hian have kept “add” and “buy” on Keppel Corporation with unchanged target prices of $6.90, $6.33 and $6.48 respectively, following the group’s plans to acquire the non-media businesses in Singapore Press Holdings (SPH).

See: Keppel Corp makes $2.2 bil offer to acquire SPH's non-media portfolio; SPH valued at $3.4 bil and Keppel plays another lead role in ongoing remaking of Singapore Inc

The deal is also accretive to Keppel Corp’s earnings per share (EPS) in FY2023, says CGS-CIMB analyst Lim Siew Khee in an Aug 2 report.

The way she sees it, the deal is estimated to add some 14% to Keppel’s net profit for the FY2023.

See also: Proposed privatisation deal of SPH by Keppel Corp 'seems fair': analysts, Taking SPH’s assets apart to recycle and Property-focused SPH to be acquired by Keppel after hiving off media assets

The group’s net gearing after the acquisition of SPH should remain largely the same as that of the 1HFY2021 at 0.85 times.

See also: CGS International increases Yangzijiang Shipbuilding TP to $2.35, ups order book win target to US$5.5 bil

This, she says, is given the “expected $1 billion cash from recent monetisation of assets, including M1 network assets ($580 million), Chengdu Shengshi Jingwei ($324 million) and Keppel Logistic Foshan ($63 million). The impending divestment of Keppel Logistic could also boost overall balance sheet position,” she says.

The research team at OCBC says the acquisition is estimated to be about 6% accretive to Keppel Corp’s EPS for the 1HFY2021 on a pro-forma basis.

“Keppel Capital’s pro-forma assets under management (AUM) can potentially grow by 27% from $37 billion as at end 2020 to about $47 billion following the acquisition,” writes the team in an Aug 2 report.

See also: RHB maintains ‘neutral’ on Japan Foods Holdings at lowered target price of 26 cents

Lim, as well as the research team at OCBC, say they see synergies in SPH’s non-media portfolio with Keppel Corporation’s capabilities in urban development, connectivity and asset management.

“These include SPH’s businesses and assets such as purpose-built student accommodation (PBSA), senior living, stakes in SPH REIT and its REIT manager as well as other development assets,” writes the OCBC team.

In their respective reports, Lim and the OCBC team also expect Keppel Corp to monetise SPH’s non-core assets, which are worth $1.1 billion.

“We believe there are already plans in mind with regards to value unlocking as a number of SPH’s assets are relatively stabilised and can be monetised through the Keppel-managed REITs and business trust within the next three years,” says the OCBC team.

Keppel could also look at enhancing the assets before monetising them, it adds.

Similarly, Lim writes that the listing of SPH’s PBSA is also on the cards.

For more stories about where the money flows, click here for our Capital section

For more stories about where money flows, click here for Capital Section

“The asset is valued at $1.4 billion ([with] net property income or NPI yield about 5.2%) with UK regional PBSA investment yields of 4-6%,” she writes. “The pace of booking for PBSA is still healthy, with occupancy of more than 90%. If all of the above are achieved in the next three years, we see upside to our distributions per share (DPS) for FY2022 to FY2023.”

For UOB Kay Hian analyst Adrian Loh, the proposed acquisition is a "bold move" on Keppel Corp's part and marks a great deal for the group's shareholders. The proposed acquisition, says Loh, will give Keppel Corp exposure to assets it does not currently own.

While the group isn't exactly asset-light, and with the acquisition bulking up its property assets in the near-term, Keppel Corp has stated that it will monetise as much of SPH's assets as far as possible.

Like the rest of the analysts, Loh also sees the deal as accretive to Keppel Corp's EPS and return on equity (ROE).

"On a pro forma basis, the combined entity would see an EPS accretion of 6% for 1H21 while ROE would have been 0.3 percentage points higher at 5.8%. In addition, Keppel Corp stated that its ROE target of 15% for 2025 remains unchanged," writes Loh in an Aug 3 report. "Given that Keppel Corp increased its 1HFY2021 dividend by 4 times y-o-y to 12 cents despite already working on this deal in 2QFY2021, we do not foresee any risk to a similarly strong dividend at end-2021."

"Our pro forma valuation with the inclusion of SPH’s assets has only risen slightly to $6.55. This incorporates a decline in Keppel Corp’s stake in Keppel REIT. We believe that this pro forma valuation for SPH may be conservative given that its assets, assuming completion of the transaction, could be monetised reasonably quickly given the enlarged platform provided by Keppel Corp across its business segments. In addition, we note that while we value SPH’s PBSA assets at 1 times P/B, similar assets are trading at 1.2-1.3x," he adds.

Daphne Lui, associate professor of accounting at ESSEC Business School Asia-Pacific says that the offer by Keppel Corporation will “increase the free floats of both Keppel and SPH REITs and help their liquidity” in the long run.

“Some have speculated that the two REITs might merge to realize the benefits of scale, but they have very different asset portfolios," she adds.

To be sure, Keppel REIT mainly has a portfolio comprising office properties while SPH REIT mainly owns retail properties, notably Paragon on Orchard Road.

“The two REITs would lose their uniqueness and focus, and investors that want exposure to specific categories of properties might not benefit from such a move,” says Lui.

See also: Is a merger between Keppel REIT and SPH REIT on the cards? DBS seems to think so

As at 4.06pm, shares in Keppel are trading 13 cents lower or 2.3% down at $5.42, or 0.91 times P/B with a dividend yield of 4.55%, according to CGS-CIMB’s estimates.

Photo: Keppel Corp

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