Temasek Holdings’ weak performance in FY2020 ended March 31 — owing to the impact of the Covid-19 pandemic — has not differed materially from its preliminary results released in July. While it continues to make new or bigger bets on long term growth trends such as technology, healthcare and financial services, some of its long-held Singapore portfolio companies could certainly do better.
For starters, Keppel Corp and Sembcorp Marine (Sembmarine) continue to be weighed by the prolonged downturn in the oil industry. Things look unlikely to improve any time soon following the March crash in crude oil prices.
Market observers have long speculated that Temasek intends to hive off the offshore and marine business of Keppel and merge it with Sembmarine. This comes after Sembmarine ceased to be a subsidiary of Sembcorp Industries, following a restructuring and recapitalisation exercise.
However, Temasek’s failed attempt to gain greater control of Keppel has cast doubts on that speculation. The state investment company invoked the material adverse change (MAC) pre-condition as Keppel sank into the red on the back of a huge impairment of $930 million.
So, what are Temasek’s plans for both Keppel and Sembmarine ahead?
Dilhan Pillay, executive director and CEO of Temasek International, says it is up to the boards of both companies to decide on their business models and how to move forward. “It’s not really for us to direct things at all. That’s not our governance framework. So, I think that’s very much up to the boards of each company as to where they see their journey going forward,” he said at Temasek Holdings’ annual briefing on Sept 8, held virtually this year.
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What about Singapore Airlines (SIA), which is another of Temasek’s portfolio companies? The national flag carrier is facing its worst crisis as international air travel has shrunk dramatically as many borders remain closed.
To strengthen its balance sheet, SIA raised $8.8 billion in a rights issue led by Temasek earlier this year. The airline also has $1.65 billion from secured financing, and more than $500 million from new committed lines of credit and a short-term unsecured loan from financial institutions.
However, half of the proceeds from the rights issue has already been used to cover operational expenditure, aircraft acquisition and debt servicing. To reduce costs, SIA announced on Sept 10 that it will cut 4,300 jobs, including those in its subsidiary airlines SilkAir and Scoot. According to SIA’s most recent annual report, it had just over 27,000 staff.
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So, will Temasek lead another round of fund-raising? Pillay says Temasek is committed to supporting SIA’s aim to raise $15 billion, which was announced in March. “SIA is managing its capital as best as it can,” he says. “They have a resilient workforce, you know, and I believe that they will come up with a way in which, when the post-Covid world allows travel to come back in, they will be able to continue operations.”
Fourth negative one-year TSR
For FY2020 ended March 31, Temasek’s total shareholder return (TSR) fell to –2.28%, down from 1.5% last year. This is the fourth time since 2003 that the investment firm had registered a negative one-year TSR. It previously recorded TSR of –9% in FY2016, –30% in FY2009 and –19% in FY2003. Temasek also announced that its net portfolio value (NPV) declined 2.2% to $306 billion in FY2020, from $313 billion last year.
Temasek typically reports its annual results in July. But owing to the Covid-19 pandemic, that was delayed to September, chief executive Ho Ching wrote in a Facebook post on July 2.
Temasek’s weak performance, however, has been downplayed by the investment company. Temasek says it has not performed any worse compared to certain benchmarks. In particular, the MSCI Singapore Index and MSCI AC Asia ex-Japan Index declined 18% and 9%, respectively, during the year. Globally, the MSCI World Index declined 6%.
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Png Chin Yee, deputy CFO and head of financial services at Temasek International, says the Covid-19 impact on the portfolio was partly mitigated by the investment company’s “resilient” private book, which has grown in recent years. As at March 31, Temasek’s unlisted assets constituted 48% of its portfolio, up from 42% last year.
In comparison, liquid and listed assets, in which Temasek owns 20% and below, grew to 37% from 36% last year. Listed assets where Temasek owns more than half, however, fell to 10% from 12% last year.
Listed assets of between 20% and 50%, meanwhile, halved to 5%. According to Png, speaking at the same briefing, the private book has “held up well” despite impairments made during the year.
Temasek’s large opening cash balance in FY2020 also played a mitigating factor. Png says the cash balance — which was not disclosed — provided a cushion to the negative mark-to-market drawdowns owing to the worldwide selldown in March.
Still, Temasek’s weak results have weighed on its longer-term performances. Over a 10-year period, its compounded TSR has fallen to 5% from 9% last year. This is worse than MSCI World’s 7%, but still better than MSCI Singapore’s 2% and MSCI AC Asia ex-Japan Index’s 4%. Over a 20-year period, the figure has fallen to 6% from 7% last year. This is also better than MSCI Singapore’s 4% and MSCI World’s 2%. Since its inception in 1974, the compounded TSR has remained at 14%, far outpacing MSCI Singapore’s 7% and MSCI World’s 8%.
Now that financial markets have rebounded, especially in the US, can Temasek continue to outperform in the long run?
Financial services, technology, life sciences
According to Png, market valuations are not cheap given the distortions caused by the low interest rate environment. This has been exacerbated by fiscal stimulus and other measures to support the global economy that has been buffeted by the Covid-19 pandemic. Against this backdrop, Png says Temasek is casting the valuations of certain tech companies with a wary eye. “So, we’re quite careful with regard to where we place our investment dollar,” she says.
Still, Temasek continues to see opportunities in the technology sector. Last year, it invested in Duck Creek Technologies, a US-based software provider to the property and casualty insurance industry. The investment company also invested in Mano-Mano, a European home improvement product online marketplace and MiningLamp, a big data solutions company in China.
Temasek also sees opportunities in the life sciences and healthcare sectors. Its investments included AIER Eye Hospital and CareBridge, an integrated healthcare system. It also invested in biopharma companies developing new drugs and therapeutic solutions such as Beam Therapeutics, Coherus BioSciences, Transcenta and Vir Biotechnology.
In the financial services sector, Temasek has increased its exposure to the payments and other non-bank financial services companies to benefit from the acceleration in digitisation of financial services. This included enlarging its stakes in PayPal, Mastercard and Visa. It also invested in emerging companies such as Blend, a US-based digital lending platform for mortgages and consumer banking.
Png says Covid-19 has accelerated the trend in digital payments. “We’re all now ordering groceries from the leisure of our homes instead of going to the supermarkets,” she says. “We see these trends [are] here to stay but they’re not going to go away just because Covid-19 has passed. I think these are very sustainable trends that we have seen accelerated.”
More recently, Temasek added a 3.9% stake in BlackRock in August, making it one of the largest shareholders of the asset management company. The acquisition was made possible after PNC Financial Services Group sold a US$14 billion stake in BlackRock this year, according to Bloomberg.
Png says she believes that BlackRock is a “high-quality” company that will outperform in the long run. She notes that the company is a market leader in environment, social and governance issues. It is also a market leader in technology, as it sells its Aladdin platform to other asset managers, she adds. “So, these would be the type of companies that we would look for and want to invest in,” she says.
