Fresh GLC mergers 'likely to lift valuations'

Singapore

A NEW wave of restructuring and internationalisation of government-linked companies (GLCs) in Singapore may lift market valuations ahead, as the country marks its golden jubilee in August, a Morgan Stanley report said.

This comes especially as a number of GLCs compete among themselves in the same sector, which could spark consolidation in time.

"We believe GLCs are likely to continue to play an important role in driving Singapore's equity market over the next 1-3 years, driven by further re-rating," the report said.

At present, the prices of Singa-pore's GLCs - when compared to expected earnings and book value 12 months from now - are at an approximate 20 per cent premium to the MSCI Singapore index. The market capitalisation of GLCs in Singapore makes up more than 50 per cent of MSCI Singapore.

GLCs have always been driving Singapore's equity market, and outpacing it. Morgan Stanley Singapore GLC Index has outperformed MSCI Singapore by around 3,700 basis points (bps) since 2000 and around 500 bps since the start of the year.

"A number of GLCs compete amongst themselves within the same sector, a strategy that seems to have been driven with an objective of job creation," Morgan Stanley said. "We believe that with value creation emerging as a new strategy, potential consolidation is plausible, which would bring potential scale and synergy benefits." It highlighted, among others, Ascendas Reit and Sembcorp Marine as firms likely to engage in consolidation.

Singapore GLCs will also have to evolve into more competitive animals in overseas markets, Morgan Stanley said. As it is, large GLCs with a clear presence in foreign markets derive around 45 per cent of their revenues from overseas, Morgan Stanley estimated. "The change in mindset is not just helping companies invest overseas - for which there is already a lot of evidence - it is about helping Singaporean companies grow into globally competitive companies that can compete with the best on the global stage."

Given this transformation that is needed, Temasek Holdings may continue to divest its non-strategic GLCs and cut stakes in a few of the listed GLCs. It may also list more assets. GLCs that are unlisted now include PSA International and Singapore Power.

"Actions by Temasek and the government suggest a change in mindset implying that private enterprise - and not the government - is best able to exploit evolving market trends and technologies. Temasek could reduce its stake in GLCs to drive its objective of total returns rather than being a caretaker of government assets," Morgan Stanley said.