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NRA Capital Pte Ltd

Written by: Editor (Admin)

Monday 26 Jan 2015

Keppel Corporation - Asset Acquisitions and Disposals

Voluntary unconditional cash offer for Keppel Land

Keppel Corp's share price may see a negative reaction in short term give the high offer price. However, we believe the offer is attractive to Keppel Land's shareholder given the current weak property cycles.

Keppel Corp announces unconditional cash offer of $4.38/share for Keppel Land Limited, and the offer is raised to $4.60/share if right of compulsory acquisition (greater than 90% acceptance) is exercised. The offers are higher than the 52-week high of $3.67 by 19% and 25% respectively. Keppel Corp will finance this acquisition through cash and debt.


  • A good investment in a business with positive medium to long term outlooks,

  • Unlocks value for Keppel Corp shareholders, as it would raise FY2014 earnings per share for Keppel Corp by 13% to $1.18 from $1.04 as well as raising ROE from 18.8% to 21%,

  • Allows the Keppel Group to grow into a more diversified group with sizable contributions from all its three core businesses,

  • leverages Keppel Corps strength to achieve best risk-adjusted returns.

Is it worth it?

Keppel Corp is making this acquisition with the long-term view in mind. The two factors to concentrate on are the long-term outlooks for Keppel Land and the capability for Keppel Corp to leverage on its business synergies to increase the potential returns from Keppel Land, as these are the longer term objectives that are primarily contingent on Keppel Lands performance.

It cannot be denied that short-term headwinds in the property market prevent any major appreciation in Keppel Lands earning potential. Weaknesses in the Singapore property market, stemming from a fall in demand for residential units and a continued increase supply of the same, are a major factor in suppressing Keppel Lands performance. It has to be noted that Keppel Land has significant investment in the China and ASEAN markets, and a cursory overview of those markets indicates accelerating middle class growth, a reliable precursor to upmarket property purchases. This is likely to be the long-term growth that Keppel Land and Keppel Corp are envisioning for the company, but achieving the desired results will take time.

With regards to the potential synergies for Keppel Corp and Keppel Land, there is significant scepticism from analysts  on whether this can be realised. The major advantage is that the larger company will have a stronger borrowing position when negotiating for financing packages. The other potential synergy rests in Keppel Land and Keppel Infrastructure potentially going into larger projects together, over and above the smaller scale individual joint-venture projects that have been engaged.

These synergies are not immediately manifest, as Keppel Corps own balance sheet takes a big hit from acquiring Keppel Land, increasing its gearing ratio from 0.11x to 0.41x.  Keppel Corp states that there is no negative impact from this increase in gearing as they are not in breach of any loan covenants, but such an increase in gearing has the potential to impact future financing terms. However, the size of Keppel Corp and business diversification reduce its risk profile notably, and this increase in gearing is not likely to negatively impact Keppel Corps ability to obtain financing. 


On balance, we think the acquisition of Keppel Land by Keppel Corp does not benefit Keppel Corp very much in the short term, given the increase in gearing for Keppel Corp and the lack of deal flow that can utilize the business synergies. However, the long-term growth potential from Keppel Land’s presence in the South-East Asia and China markets may realize significant gains for Keppel Corp in the longer term. Barring a sustained slowdown in the economic growth in Asia, the long-term contributions from Keppel Land look to be substantial.


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