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Morningstar | Proposed Privatizations of M1 and KTT Have Limited Impact on Keppel Corp’s FVE

No-moat Keppel Corp has announced that it will partner with Singapore Press Holdings, or SPH, to make a voluntary general offer for M1. Meanwhile, Keppel also proposed a scheme of arrangement to privatize Keppel Telecommunications & Transportation, or KTT. We retain our fair value estimate of SGD 8.50, as we see less than 2% negative impact on our valuation even if both deals are completed. We are negative mainly due to the premium offered to acquire M1, which may cut our valuation on Keppel by more than SGD 300 million. The offer price is set at SGD 2.06 per share, a premium of about 34% to our fair value estimate of SGD 1.54 for M1.

Axiata is the current major shareholder of M1 with approximately a 29% stake, followed by Keppel’s (via KTT) 15% and SPH’s 13%. If the privatization is successful, Keppel will effectively own about 84% of M1. The deal is subjected to approvals by relevant parties and should be completed in first-quarter 2019. Keppel believes the acquisition will allow it to transform M1’s business while creating synergies with the group. M1 will act as a digital platform to provide solutions for smart cities, as Keppel is aiming to become a leading solutions provider for sustainable urbanization. In our view, the deal is expensive, as the transformation of M1 will take several years and requires significant investment, given the competitive landscape in Singapore’s telecommunication sector. That said, it will also provide stability to Keppel’s future earnings and reduce the firm’s dependence on the offshore marine sector.

On the other hand, KTT’s key businesses include providing integrated services and solutions in logistics and data center. KTT currently owns a 19.3% interest in M1. The offer price of SGD 1.91 per share represents a 24% premium to KTT’s net asset value and a trailing P/E of 16.4 times. While the acquisition is not cheap, this is offset by the firm’s potential in the fast-growing data center, e-commerce, and logistics segments.

Keppel already owns 79% of KTT, and we think the deal will allow the firm to simplify its corporate structure and better utilize its resources. The deal is also subjected to approvals by relevant parties and should be completed in first-quarter 2019.

Given Keppel’s healthy balance sheet, we do not expect financing to be an issue in completing these deals. We think the firm’s net gearing ratio will remain comfortable at around 0.6 times after the acquisitions, versus about 0.5 times as at year-end 2017.