Abandoning its marine business?! Keppel Group seeks to divest assets and "travel light"

To achieve the Vision 2030 development blueprint, Keppel Group intends to shed its asset-heavy model and "travel light," including divesting or merging its subsidiary Keppel Offshore & Marine, and plans to sell off realizable assets worth S$3 billion to S$5 billion (approximately US$2.2 billion to US$3.67 billion) within the next three years. This also means that Keppel Group may completely abandon its shipbuilding and offshore engineering business, and rumors of a merger between Keppel Offshore & Marine and Sembcorp Marine in Singapore are again rife. However, this time, regardless of whether the merger is successful, Keppel Offshore & Marine, one of Singapore's two major offshore engineering giants, will become a thing of the past.

Keppel Group's Future Vision: Abandoning the Asset-Heavy Model and "Traveling Light"

It is understood that Keppel Corp Group in Singapore disclosed its "Vision 2030" development blueprint in May this year, hoping to shift from a profit model based on large-scale projects to a recurring income model, striving to achieve a target return on equity (ROE) of 15%. To this end, Keppel Group announced in April a strategic review of its logistics business and has now decided to conduct a review of its offshore and marine (Keppel Offshore & Marine) business as well.

Loh Chin Hua, Executive Director and CEO of Keppel Group, said that when conducting a strategic review of Keppel Offshore & Marine, the board of directors and management will consider all options. One option is to review Keppel Offshore & Marine's current development strategy and business model, assess its existing capabilities and global shipyard network, and restructure to seek opportunities as a renewable energy asset developer; another is to explore suitable strategic mergers or divestment opportunities.

Loh Chin Hua estimated that the strategic review of Keppel Offshore & Marine will take several months to complete, "We are still in the very early stages," "This is a challenge the group is facing, and we will focus and work hard to find a sustainable long-term solution."

In addition to the strategic review of Keppel Offshore & Marine, another important strategy for Keppel Group to achieve "Vision 2030" is asset-light. As part of its asset-light business model, Keppel Group, based on its balance sheet as of June 30, 2020, identified assets with a total book value of S$17.5 billion (approximately US$12.8 billion) that could potentially be monetized over time and used for growth plans.

       Keppel Group's S$17.5 billion in realizable assets include S$7 billion in land reserves and projects under development, S$4.8 billion in assets that can be monetized through real estate or other investment trusts, S$3.9 billion in non-core assets (including Keppel Offshore & Marine's drilling rigs), and S$1.8 billion in investments.

Loh Chin Hua said that Keppel Group is committed to unlocking S$3 billion to S$5 billion in realizable asset value over the next three years. He pointed out that there are many ways to monetize. Taking land reserves as an example, the group can develop them independently, or jointly with partners, or sell them.

In addition, Keppel Group also emphasized that the above S$17.5 billion in assets does not include Keppel's key business platforms, fixed assets (such as Keppel Offshore & Marine's shipyards), or the group's holdings in real estate or other investment trusts.

With these realizable assets, Keppel Group plans to redeploy resources in areas such as data centers, environmental solutions, renewable energy, urban development, and asset management to seize new growth opportunities. Loh Chin Hua pointed out that the development of these areas has not been affected by the novel coronavirus pandemic, and some areas have even been accelerated by the pandemic.

Loh Chin Hua believes that Keppel Group can achieve "Vision 2030" through rigorous financial discipline and action strategies, and thrive in the promising field of sustainable development, "Keppel Group is prepared to withstand this challenging environment and chart a course for our growth."

Will Temasek make another move? Merger of Singapore's two major offshore engineering giants

       For a long time, Singaporean analysts have hoped that Keppel Offshore & Marine could merge with another Singaporean offshore engineering giant, Sembcorp Marine, to integrate Singapore's offshore engineering construction industry and achieve better economies of scale.

More than three months ago, Sembcorp Industries announced its plan to spin off its subsidiary Sembcorp Marine, and the market believed that the main theme of the merger of the two local shipyards was about to begin; a year ago, Temasek Holdings made a partial acquisition offer to Keppel, and the market also predicted that this was a prelude to the merger of local shipyards.

In the first half of this year, due to Keppel Offshore & Marine's huge impairment loss of S$890 million, Keppel Group's overall performance was dragged down, resulting in a net loss of S$537 million for the group in the first half of the year, failing to meet the conditions precedent for the Temasek acquisition. Temasek announced that it would abandon the approximately US$3 billion acquisition of Keppel Group's controlling stake, and the potential merger of Singapore's two major offshore engineering giants once again became a distant prospect.

When Keppel announced a strategic review of its offshore and marine business, speculation about a merger between Keppel Offshore & Marine and Sembcorp Marine resurfaced in the market, driving up the share prices of Keppel and Sembcorp Marine during the day yesterday.

But this time, even market analysts are not sure.
 

Most analysts believe that "the possibility of a merger cannot be ruled out." For example, OCBC Investment Research pointed out that Keppel Group plans to monetize S$3 billion to S$5 billion in assets over the next three years to unlock some value. The monetizable assets listed by Keppel do not include shipyards, but do include Keppel Offshore & Marine's drilling rigs, which are considered non-core assets. Conservatively estimated, the market value of these saleable drilling rigs is approximately S$1.5 billion to S$1.6 billion.

DBS Group Research analysts believe that injecting Keppel Offshore & Marine into Sembcorp Marine is the most feasible way for Keppel to exit the offshore and marine business. She believes that this must be driven by Temasek, the current major shareholder of Sembcorp Marine, because Sembcorp Marine may not have sufficient financial strength.

The market originally expected that the successful spin-off of Sembcorp Industries and Sembcorp Marine, and Temasek's completion of its increased stake in Keppel, would help to promote the merger of the two shipyards. Unexpectedly, on the day before Sembcorp Marine and Sembcorp Industries held their extraordinary general meetings, Temasek announced the termination of its offer to increase its stake in Keppel.

However, Temasek's attitude remains key to whether or not a merger will take place, but it will not be easy for Temasek to push for a merger.

Loh Chin Hua, Executive Director and CEO of Keppel Corporation, clearly stated: "Temasek will not participate in the strategic review of Keppel Offshore & Marine's business." Loh Chin Hua did not disclose any information about whether the strategic review is inclined towards merger, divestment, or other options.

An analyst pointed out that although shipyard mergers are economically beneficial, Temasek does not have controlling rights over Sembcorp Marine and Keppel with more than 50% equity, so it is not so easy to promote mergers.

Whether Temasek will make another move this time remains to be seen.