SINGAPORE (Oct 22): Investors are jumping on the opportunity to capitalise on Keppel Corporation, as Temasek Holdings moves to raise its stake in the conglomerate, with the prospect of a “comprehensive strategic review”.
On Monday, Temasek Holdings announced a partial offer to acquire an additional 30.55% of shares in Keppel through its wholly-owned subsidiary, Kyanite Investment Holdings. If successful, Temasek and Kyanite will own a combine 51% of shares in Keppel on completion.
At $7.35 apiece, Temasek’s offer price translated into a premium of some 26% against Keppel’s closing share price of $5.84 on Oct 18, the last traded price prior to the announcement. The total consideration for the acquisition was $4.08 billion.
Shares in Keppel Corp surged 15.9% to $6.77 on Monday morning, with some 22.1 million shares changing hands.
According to Temasek, the offer seemed to be worth every penny. “The partial offer reflects our view that there is inherent long term value in Keppel’s businesses, notwithstanding the challenges presented by the current business and economic outlook,” said Tan Chong Lee, president of Temasek International and director of Kyanite.
Analysts echo similar sentiments, citing that the move is likely to open the door for bigger things to come as Temasek takes a proactive approach in reviewing its portfolio and investments for the longer term.
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A risky, but necessary move
On a global front, mega shipyard mergers have been taking place one after another, indicating a trend of consolidation.
In August, South Korea’s merger of Hyundai Heavy Industries and Daewoo Shipbuilding and Marine Engineering, as well as the Beijing-engineered merger between China Shipbuilding Industry Corp and China State Shipbuilding Corp took the global shipping industry by storm. This, according to an online valuation by data provider VesselsValue, would result in two behemoths controlling some 46% of the global market among the world’s top 10 yards.
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The global shipping industry, according to IHSMarkit, is just regaining its footing after a decade-long downturn in maritime trade. “Consolidation seems to be the way forward for the shipbuilding industry at the moment and intensification of competition among major shipbuilding countries will promote cost competition,” it said in a report in March.
According to KGI Securities Research analyst Joel Ng, the proposed acquisition is nothing short of necessary for Temasek in order for Singapore to compete globally.
“They had little choice but to make this offer, and they seem determined to see this through,” Ng says in a phone interview with The Edge Singapore.
“It would be extremely difficult for Temasek to compete with the likes of China and South Korea independently, hence it was imperative that they actively consolidate,” he adds.
Keppel well-placed to weather storms
The announcement closely followed Keppel’s 3Q19 results which, at face value, revealed a fairly dismal quarter for the group. The conglomerate had missed analysts’ estimates, as earnings plunged some 29.7% to $159.3 million during the quarter from $226.6 million in 3Q18.
In its earnings call, Keppel noted that the decline was primarily attributable to the absence of one-off gains from the group’s divestment of a commercial development in Beijing, as well as higher net interest expenses.
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“The keyword was one-off,” Ng stresses. He opines that Keppel has several sectors that are poised to continue contributing positively to earnings.
Despite the stumble in topline revenue figures, market watchers were bullish on Keppel’s ability to thrive especially as its underlying operations remained healthy.
DBS Group Research noted in a report on Oct 18 that Keppel is well-positioned to benefit from the recovering O&M orders, as well as rising property sales in key Tier 1 and 2 cities in China and Vietnam.
“Year to date, Keppel has won $1.9 billion new contracts, 10% higher than $1.7 billion secured in the whole of 2018,” said analyst Ho Pei Hwa.
Meanwhile, RHB analyst Leng Seng Choon focused in particular on the group’s O&M division, noting the 52% surge in revenue to $632 million on the back of higher revenue recognition from ongoing projects.
And moving forward, he believes the division’s settlement agreement with Sete Brasil would essentially pave the path for further revenue growth.
KGI’s Ng agrees. “Moving forward, Keppel’s earnings are unlikely to see drastic declines, and this is therefore likely to be the reason why Keppel waited till after the release of its results to declare the partial offer,” Ng says.
The best is yet to come
The analysts are also quick to highlight talk of a potential restructuring of businesses under Keppel Corp and Sembcorp industries, such as the merging of offshore and marine yards.
The research team at OCBC Investment Research notes that this would entail a strategic review of their businesses, which includes the possibility of a restructuring.
“It sets in motion a series of potential transactions that may happen, and we note that it is also mentioned in the offer document that creating sustainable value through such actions may take several years,” OCBC says.
RHB’s Leng also notes that shareholders and investors could reap handsome profits in due course as Keppel and Temasek join forces to unlock value in Keppel through restructuring.
“Following the successful close of the partial offer, Temasek intends to work with Keppel’s board of directors to undertake a comprehensive strategic review of the company’s businesses, with the objective of creating sustainable value for all shareholders,” says Leng in a Tuesday report.
“The partial offer represents an opportunity for shareholders to realise part, or potentially all, of their investment at a premium over the last traded price prior to the announcement,” he adds.
To be sure, Keppel’s diversified asset structure is reflected in its multiple businesses in different industries. The company prides itself on its diversified business portfolio – including offshore and marine (O&M), infrastructure, property and investments – that enables it to weather cyclical headwinds.
This partial offer by Temasek, according to market watchers, could well be the genesis of creating sustainable value for the group’s shareholders as the possibility of a business restructuring is in the pipelines.
Both RHB and OCBC are maintaining their “buy” calls on Keppel, with target prices of $7.80 and $7.58 respectively.
As at 12.38pm, shares in Keppel are trading 93 cents higher at $6.77.
