Wolf Money(Keppel Corporation)
As promised from my last blog, I did some calculation on Keppel. I have included SPH into my calculation due to the likely completion of takeover by Keppel. The egm for SPH is likely to pass due to management shares having overwhelming voting rights(2 to 1 or 66% vs 33%) over ordinary shareholders. The management are allowed to vote on both resolutions at SPH egm on 10 Sept. I will concentrated on two game changing corporate actions happening at Keppel Corp. First been the takeover of SPH, second the merger of O&M business with Sembmarine and Temasek setting up Asset Co to take over legacy rigs and receivable of Keppel O&M
SPH
The analyst at cimb had made light work for my research. They have summarised the assets in SPH in one short list. I am in most agreeable to the valuation put on SPH by the analyst except for a few items on the list.
The main asset of which I think is under appreciated by the market is sph’s pbsa asset. Recently Mapletree which is another Temasek company bought 4 properties in UK with 917 units of student accommodations at $306m which work out to about 333k per units(I took it as most pbsa are similar in small size so as to achieve higher rental yield per sqft)The locations of pbsa purchase by Mapletree purchases are similar to those of SPH’s pbsa. If we base on 7439 pbsa owned by SPH. That will give you a valuation of close to 2.4b given what Mapletree had paid for pbsa in uk recently. If I apply a 20 percent discount on the units. SPH’s pbsa is still close to 2b worth. I took it further by excluding the value of 258 units of pbsa owned by SPH in Germany. There is a huge shortage of pbsa in UK as students applying for higher learning in UK jumped 2x as compare to last year and the numbers were higher than 2019. Rental are up 15 percent in some accommodations in London. Favourable tailwind is likely to support a higher valuation for pbsa asset.
(Mapletree acquisition of 917 units of pbsa at $306m in UK)
There are also some other pockets of undervalued asset included three Nassim Road GCB which the analysts valued at around 3k psf. Given the prestigious address at Nassim Road, SPH should have no problem fetching at least 3.5k psf given the wife of Nanoflim ceo bought one GCB along Nassim Road for 4K psf. The value of the 3 GCB is likely closer to 160m vs 133m given value.
Another asset which I think is undervalued by the market is the Genting Lane data centre which SPH owned 40 percents. Base on the presentation slide. SPH 16 percent in M1 is valued 300m which leave the Genting Lane GDV(100%) to be around 900m minus 400m which is the cost to development. Development profit 500m x 40 percent = 200m vs 24m given by the analyst. If I apply a 50 percent discount, the Genting Lane data centre is still worth north of 100m. Authority had stop issuing approval on new data centre project in Singapore due to environmental concern which might aid value to the current data centre project.
All in all there is a valuation gap of 600m-700m which is accretive to Keppel Shareholders to a tune of 33c to 38c per Keppel Share base on the current offer of $2.099 for SPH. I didn’t take into account the reversionary interest on Paragon Mall which is a freehold site sold for 99 years into SPH Reit. The takeover deal is conditional to SPH changing its media business into CLG.
Keppel O&M
The main game changer for Keppel will be the selling of O&M business to Sembmarine. At present point detail are limited. My guess, the combine company should have a market cap of around 4b. If Keppel is taking 10 percent of combine company plus 500m cash plus 700m of debt to be transferred to the new entity. The total deal might work out to be 1.5b-1.6b which is around 1x book of Keppel O&M. Debt to equity will be lowered. Nta will increase by at least 500m
Temasek will be setting up an Asset Co to find investors for the purpose of buying legacy rigs and trade receivable with Keppel in return receiving credit notes. No detail was given. I suspect the ratio to be in form of 20:20:60 split of share in asset co, cash and credit notes to Keppel. Keppel will received up to 750m in cash initially for 3.8B worth of rigs and receivable. The credit notes will be paid progressively once receivable and rigs are received or sold minus the return to investors. This arrangement is especially useful for improving cash flow and lowering of debt profile. Debt to equity is likely to lower down to below 0.6x when the both corporate action are done. I do see Keppel trading towards a minimum value of its 5 years average book value of 1x book value which is around $6.20 on a conservative basis when both deals are done and dusted. Of course fair value will improve further if there are more news on their monetisation program. Management had repeatedly mention about returning capital to shareholders if there are no use for it. All in all not a bad deal for Keppel shareholders.
* Kindly do take note, there are a fair amount guess work or speculation given the detail on O&M merger and Asset Co are few and far between. I strongly urge everyone who is reading this to take it with a pinch of salt. Do your own due diligence. It shouldn’t be taken as a done deal. Just for sharing, no expert view.
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