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KepLand soars on privatisation bid; KepCorp edges up amid mixed views

Tuesday, January 27, 2015 - 05:50
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KEPPEL Corp shares opened to a relatively muted market reaction on Monday, while Keppel Land's shares surged, after the conglomerate unveiled a bid to take its real estate subsidiary private.

Singapore

KEPPEL Corp shares opened to a relatively muted market reaction on Monday, while Keppel Land's shares surged, after the conglomerate unveiled a bid to take its real estate subsidiary private.

Keppel Corp edged up six cents, or 0.7 per cent, to end the day at S$8.16 even as analysts applied bigger conglomerate discounts to their target prices.

Keppel Land shares shot up 90 cents, or 25 per cent, to S$4.55 to hit a four-year high, as more investment analysts recommended minority shareholders to accept the offer for its generous price. Both the stocks were trading cum dividend.

Some analysts also raised their target prices on KepLand to match the higher offer price of S$4.60.

That Keppel Land surpassed its base offer price of S$4.38 to approach S$4.60 was taken by analysts as a sign that much of the market is expecting acceptance levels to reach 90 per cent.

Both counters made it to the top two spots by trading value on the Singapore Exchange (SGX): some 25.4 million Keppel Corp shares worth S$207.9 million changed hands while 43.9 million Keppel Land shares, nearly 10 times the average trading volume over the last 10 days, worth S$199.3 million were traded.

The relatively muted market reaction towards Keppel Corp showed the mixed views that analysts and investors had as they weighed the merits of the deal for the conglomerate.

Those who had "buy" calls on Keppel Corp pointed to the company's attractive valuations and dividend yields. However, others warned of headwinds coming from the oil and gas and property sectors. Target prices were a wide range from S$7.65 to S$11.30.

Analysts said that the outlook for Keppel Corp's shares could be cloudy in the near term.

"Given the rich price offered for Keppel Land and (that) synergies for the combination may not be immediately apparent, there may be some near-term weakness in Keppel Corp's share price," said OCBC analyst Low Pei Han.

Agreeing, Maybank Kim Eng analyst Yeak Chee Keong said that investors would not be excited over the stock until Keppel Corp has demonstrated the long-term value it can create through the privatisation of Keppel Land.

Analysts applied steeper conglomerate discount rates of 10-20 per cent as they took into account Keppel Corp's bid to take Keppel Land fully under its fold. If the privatisation is successful, Keppel Corp's 2014 net profit contribution from offshore and marine is seen falling from 55 to 48 per cent. Net profit contributions from property are seen rising from 26 to 35 per cent.

Some, however, reckoned that amid the gloomy outlook in oil and gas, further leaning on property as a diversification is not a bad thing.

JP Morgan analyst Ajay Mirchandani said Keppel Corp shareholders were largely offshore and marine-focused and "the move would partially offset the emerging headwinds for this segment and enable management to continue to focus on returns, efficient use of capital and dividends".

Keppel Corp last Friday ended rife speculation in the market when it launched a two-tier price bid for the shares that it does not own in Keppel Land, its 54.6 per cent real estate subsidiary.

If acceptance levels exceed the 90 per cent threshold, turning the offer into a compulsory acquisition, the offer price would be raised from S$4.38 to S$4.60 a share, valuing the real estate company as much as S$7.1 billion.

Among the more bullish analysts was Macquarie Research analyst Somesh Agarwal, who hailed Keppel's move as a bold one that will help shareholder value. Earnings estimates would go up even as property becomes a larger component of Keppel's profits, he said.

Valuations of Keppel Corp are also now attractive - forward earnings would be 8.3 times, one standard deviation below average levels, Mr Agarwal added. On a price to book basis, Keppel is trading at close to global financial crisis valuations of 1.3 times despite enjoying a 16 per cent return on equity this year.

Keppel's dividend yield is sustainable and can be maintained in the next three years, giving a 5-6 per cent yield, Mr Agarwal added.

At a forward earnings multiple of 9.3 times, Keppel Corp is trading at one of the lowest earnings multiples when compared with regional conglomerates such as Jardine Strategic (13.1 times) and Swire Pacific (14 times), Credit Suisse analyst Gerald Wong noted.

Morgan Stanley, with its "equal-weight" call, was more neutral. It sounded out concerns over privatisation, including expensive inventory at Keppel Land in a weak property cycle, a rich premium for a real estate privatisation, higher gearing, and a potential conglomerate discount.

Hong Kong conglomerates with privately-held property businesses have traded, since 2008, at an average discount to net assets of 33 per cent, its analyst Ling Xin Jin pointed out.

And while Keppel Corp's management had highlighted the possibility of Keppel Land tapping on Keppel Corp's financial might for easier access to financing, Ms Ling noted that Keppel Land had an interest cost of 1.3 per cent in 2014, lower than Keppel Corp's 1.8 per cent.

The move by Keppel Corp also stands out in contrast to the direction taken by Hong Kong conglomerates in recent years, she added.

Conglomerates such as Swire Pacific have spun off their property arms in recent years to unlock shareholder value and narrow their discounts to net asset value.

For Keppel Land, which enjoys a premium of at least 25 per cent over the one-month volume weighted average price through the base-price offer, the surge in its share price came as no surprise.

An analyst, who declined to be named, noted that Keppel Corp had said it was not going to revise the offer price upwards, so from minority shareholders' perspectives, they might as well take the higher price past the 90-per-cent acceptance level threshold. "It's not just about the lower price. With a smaller free float, it could also affect the share price performance post-offer."

UOB Kay Hian analyst Vikrant Pandey noted though that Keppel Land's counter has yet to reach S$4.60, which could indicate slight uncertainty, perhaps from long-term strategic institutional shareholders or retail investors who had bought the stock much earlier at higher prices.

They could be holding back for a higher offer, given that the offer price is still below its net asset value of S$4.95 at end-2014, he said.

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