Keppel Corp is selling its entire 45.51% stake in SPC at S$6.25 or S$1.47bn in total. As a result, we have raised our FY09 earnings forecast by 51% to S$1.6bn to account for the divestment gain of S$660m upon the completion of the deal by Jul 09. We have cut our FY10-11 forecasts by 9-10% to reflect loss of earnings contributions from SPC. We lift our target price from S$6.30 to S$7.20, incorporating the offer price for SPC, marked-to-market adjustments for Keppel's listed entities and higher P/E targets for the offshore & marine business. We maintain our Underperform rating given limited upside potential.

Sold to PetroChina for S$1.47b. Last evening, Keppel Corp (Keppel) announced that it had entered into a conditional agreement with PetroChina Company Limited to sell its entire shareholding in Singapore Petroleum Company (SPC). This represented 45.51% of the total issued share capital of SPC for a cash consideration of S$6.25/share, equivalent to S$1.47b to be paid in full on completion. The offer price of S$6.25/share is a 24% premium to SPC's last closing price of S$5.04/share.

We think PetroChina willingness to pay this premium lies in SPC's 50% stake in Singapore Refining Company. SPC jointly owns the 290,000 bbl/day SRC plant with Caltex, and is an industry player with more than 30 years of extensive refining and marketing network especially in the Southeast Asia region. We think PetroChina's acquisition at this premium is largely due to its willingness to price a higher intrinsic value for SPC's refining business. Based on our calculations, the cash consideration of S$6.25/share implies PetroChina has factored in near-term refining margin assumptions of US$6.30/bbl and US$6.50/bbl for FY09 and FY10 respectively, and long-term China refining margin of US$6.00/bbl.

We urge investors to accept PetroChina's Mandatory General Offer for the remaining shares of SPC. According to the press release issued by PetroChina yesterday, PetroChina would be intending to make a Mandatory General Offer for the remaining shares of SPC upon completion of the acquisition, but this is subjected to Chinese regulatory approvals. Supported by the central government in its aim to improve the country's oil self-sufficiency, we believe PetroChina is likely to get the green light from the Chinese government. Hence, we urge investors to accept the offer.