Keppel Land's rights issue: win-win situation for Keppel Corp

S$712 million Keppel Land rights issue; Keppel Corp may have stake raised upto 72.63%: Keppel Land announced a fully underwritten 9-for-10 rights issue of 653.6 million new shares at S$1.09 each. Keppel Corp has (a) provided an irrevocable undertaking to subscribe in full for its pro-rata entitlement ‘plus’ (b) entered into sub-underwriting agreement to subscribe up to 90% of unsubscribed portion effectively guaranteeing to subscribe up to 95% of Keppel Land rights issue. Keppel Corp will provide funding of S$373 million (under Scenario 1 i.e. only point a) or maximum of S$678 million (under Scenario 2 i.e. (a) + (b)) of the rights issue. Under Scenario 2, Keppel Corp’s stake in Keppel Land will rise to 72.6% from current 52.6%.

Funding overhang on property segment abated for now; deal largely NEUTRAL to Keppel Corp shareholders: While one of our concerns on Keppel Corp remained the ‘conglomerate structure’ in current environment especially given the funding needs of its property subsidiary, we believe the current deal is a win-win situation for Keppel Corp. Given the steep discount of rights price, either (a) existing shareholders of Keppel Land take up their pro-rata share of the rights issue i.e. lessening cash outflow from Keppel Corp or (b) Keppel Corp takes up its entire commitment which would be less dilutive to it. However post-transaction Keppel Corp would move from net cash position (incl. deposits) of S$174 mn to net debt of S$199 / S$504 mn.

Keppel Corp: minimal valuation impact; EPS neutral in Scenario 1, 0.5- 1.5% EPS accretive in Scenario 2. Based on our calculations, in Scenario 1, we estimate our SOTP would be down 1.6% to S$5.66 while in Scenario 2, SOTP would be down 1% to S$5.69. While this may seem counter- intuitive (especially for Scenario 2 given the steep discount of rights price), this is based on our property team's revised Dec-09 PT on Keppel Land of S$1.25 (on post rights basis, see note published on April 24). Our sensitivity analysis suggests it would have been valuation neutral for Keppel Corp assuming Keppel Land’s valuation goes up to S$1.44 / S$1.35 (for Scenario 1/ Scenario 2).

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