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1) What has happened so far
2) We think Temasek will likely revise the offer price downwards… as opposed to walking away from the deal
3) If Temasek revises offer price to ~S$6.90, should you buy Keppel Corp?
Disclaimer: We currently hold Keppel Corp shares and plan to accumulate more shares in the coming days.
InvestQuest’s View: Keppel looks cheap to us at current prices, should Temasek come up with a revised offer price of S$6.90 or higher. At today’s close of S$5.40, a revised offer price of S$6.90 would imply S$4.44 price for residual shares that are not covered by the partial offer. We find this S$4.44 to be very cheap given that the lowest Keppel price since the start of 2010 is $4.71, when the Brent crude price was 30% lower than it is today. Meanwhile, relative to today’s close of S$5.40, the average broker target price for Keppel stands at S$6.34. We currently hold Keppel and will be accumulating more of the stock going forward.
1) What has happened so far
Here are the main things you need to know about Keppel Corp.
- In Oct 2019, Temasek made a partial offer for Keppel at S$7.35 in cash per share. Note that Temasek already owns shares and that this this is a PARTIAL offer. In Keppel’s case, it means that Temasek only wants to buy 38.91% of shares held by others. If you have 1000 shares in Keppel, Temasek will pay you S$7.35/share for 389 of those shares. To understand where we got this 38.91%, see the footnotes at the bottom of this Temasek page or press Control+F.
- This offer has pre-conditions that Keppel has to maintain for the deal to go through. Each of the Pre-Conditions must be satisfied or waived (at the discretion of the Temasek) by 21 October 2020. You can read the list of pre-conditions in Schedule 1 of this document.
- Last Thursday, Keppel announced it had failed one of these pre-conditions, when it released its quarterly earnings. Under the terms, Keppel’s profit after tax must not fall by more than 20 per cent or about $557m over the cumulative four quarters from the third quarter of last year (as quoted from the Straits Times).
- Temasek has three options – 1) waive this pre-condition and maintain current offer, 2) lower offer price, or 3) drop the offer entirely. Over the weekend, Morgan Stanley Asia (Singapore) said Temasek will decide by the end of this month whether to invoke the material adverse change (MAC) clause in its partial offer for Keppel.
- Meanwhile, Keppel’s book value has dropped from S$6.06/share as of Sept 2019 to S$5.70/share as of Jun 2020.
2) We think Temasek is highly likely revise to the offer price downwards, as opposed to walking away from the deal
Recall that Temasek has three options: 1) maintain the current offer, 2) lower offer price, or 3) walk away from the deal entirely.
We won’t consider option 1, since it’s more favourable for Temasek to choose option 2 (lower offer price).
However, between option 2 and option 3, we believe Temasek will prefer to lower offer price and go ahead with the deal, as opposed to walking away.
These are our reasons for why we think Temasek will come back with a lower offer price.
- Temasek has strategic reasons for the partial offer. These reasons are still valid, even after Keppel has failed the stipulated pre-condition.
- Quoting the Straits Times in Oct 2019: “After the successful close of the offer, [Temasek’s subsidiary] intends to work with Keppel’s board of directors to undertake a comprehensive strategic review of its businesses with the objective of creating sustainable value for all shareholders.”
- It has been suggested that Temasek could divvy up Keppel’s subsidiaries and merge it with other players in the Temasek portfolio – which could unlock value for both Keppel shareholders and Temasek. For instance, the marine segment of Keppel could merge with Sembcorp Marine, while the property portion of Keppel could be combined with CapitaLand.
- We expect the Sembcorp Marine and Sembcorp Industries’ restructuring to go through. If it does goes through, it will make a potential restructuring of Keppel easier for Temasek. Given this, we believe that positive results from the SMM/SCI EGM would increase the likelihood that the Temasek will come back with a lower partial offer price for Keppel. This sentiment is echoed in UOB Kay Hian’s research report.
What could the new offer price be? Our guess is S$6.90.
Why we’re guessing S$6.90. Temasek’s first offer was at S$7.35 in Oct last year. This was 21% above Keppel’s book value per share as of Sep 2019 (book value of S$6.06/share). Should Temasek make a lower offer this time, we believe it could be 21% above the latest book value figure of S$5.70 per share. 121% of S$5.70 is S$6.90.
Just as reference, here’s what other brokers have suggested for a revised offer price by Temasek. DBS suggested that the revised offer price could be S$7.20 (original offer of S$7.35 lowered by the dividends declared). Meanwhile, UOB Kay Hian has suggested an offer price range of S$6.29 to S$6.86 (using a P/B range of 1.1x to 1.2x, versus the 1.21x P/B for the original offer). Both DBS and UOB Kay Hian currently have BUY ratings on the stock – S$6.40 target price by DBS and S$7.10 target price by UOB Kay Hian. To see more broker reports, click here. To see broker ratings, check the end of this article.
For context, it’s unlikely that Temasek will “lowball” with the revised offer price as they will need to get permission from the Securities Industry Council for a revised offer price.
3) If Temasek revises offer price to S$6.90, should you buy Keppel Corp?
In short, we think yes! But it’s not so straightforward.
Remember that Temasek’s offer is a PARTIAL offer. In the case of Keppel, it means that Temasek only wants to buy 38.91% of shares held by shareholders like you and me.
Then how to judge whether the current price is cheap or not? Let’s think about this working backwards.
At today’s closing price of S$5.40, assuming that Temasek does revise the offer price to S$6.90, what is the implied price of the shares that are NOT bought by Temasek? Let’s call this implied price “z”
We need to solve for “z”, the implied price of residual shares not covered by the offer. S$5.40 = (38.91% x S$6.90) + (61.09% x “z”)
We get S$4.44 for the implied price of residual shares not covered by the offer.
So is this $4.44 cheap or not? We think it’s very cheap, looking at current oil price levels. The lowest Keppel’s share price has ever been since the start of 2010 is $4.71 on 26 Jan 2016, when US Brent Oil was trading at US$31.80. Given that US Brent Oil is currently trading 42% higher at US$45.20, we see a S$4.44 implied price for the residual shares as being very cheap.
In the longer term, Temasek’s restructuring efforts can make a difference for minority shareholders
Furthermore, if Temasek can execute Keppel’s restructuring well (post offer), this will be beneficial for Keppel shareholders in the longer-term. For instance, Temasek could divvy up Keppel’s subsidiaries and merge it with other players in the Temasek portfolio – which could unlock value for Keppel shareholders. For instance, the marine segment of Keppel could merge with Sembcorp Marine, while the property portion of Keppel could be combined with CapitaLand. The potential cost-reductions and improved competitiveness from such mergers could help bolster any potential sale price that Keppel could get for its subsidiaries.
Most brokers currently have BUY ratings on Keppel Corp, post the latest developments. The average target price for Keppel is S$6.34, as compiled by Bloomberg.
InvestQuest’s View!
Keppel looks cheap to us at current prices, should Temasek come up with a revised offer price of S$6.90 or higher. At today’s close of S$5.40, a revised offer price of S$6.90 would imply S$4.44 price for residual shares that are not covered by the partial offer. We find this S$4.44 to be very cheap given that the lowest Keppel price since the start of 2010 is $4.71, when the Brent crude price was 30% lower than it is today. Meanwhile, relative to today’s close of S$5.40, the average broker target price for Keppel stands at S$6.34. We currently hold Keppel and will be accumulating more of the stock going forward.
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