Hot stock: Keppel sinks 11.7% after Temasek pulls offer; DBS downgrades it to 'hold'

SHARES of Keppel Corp were dragged on Tuesday morning, as investors reacted to the surprise announcement that Temasek Holdings will not proceed with its S$4 billion partial offer for the conglomerate.

Right after the opening bell, the counter plummeted 11.7 per cent or S$0.63 to a record low of S$4.77. It clawed back some losses to trade at S$4.88 as at 11.15am, down 9.6 per cent or S$0.25 from Friday's close, after 16.9 million shares changed hands. The stock was the most actively traded by value on the Singapore Exchange in the morning.

DBS Group Research downgraded the stock to "hold" from "buy" on Tuesday, and cut its target price to S$5.50 from S$6.40 previously.

Meanwhile, CGS-CIMB continued to recommend "add" on Keppel - but only after the share price shock has subsided - and kept its target price unchanged at S$6.46.

CGS-CIMB analyst Lim Siew Khee said in a note on Monday night that once the share price has fallen to S$4.88 - its previous trough of 0.82 times price to book value (P/BV) during the 2016 oil price crisis - the market would have "significantly discounted" Keppel's offshore and marine (O&M) business to distress values of 0.2 times P/BV.

On Monday afternoon, Morgan Stanley Asia (Singapore) announced, on behalf of Kyanite Investment Holdings, that the Temasek subsidiary had decided to invoke the material adverse change (MAC) pre-condition and thus withdraw its partial offer. Keppel breached the MAC clause when it posted a S$697.6 million net loss for the second quarter of this year.

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In a research note on Tuesday, DBS analyst Ho Pei Hwa wrote that while another offer for Keppel by Temasek over the next 12 months might be "less likely" - and will require consent from the Securities Industry Council of Singapore - DBS is not ruling out other potential plans for Keppel's restructuring.

Keppel on Monday said it intends to engage Temasek, which remains its single largest shareholder, to "explore opportunities for strategic collaboration", and this will be in line with the conglomerate's Vision 2030 strategy for long-term transformation.

DBS's Ms Ho noted that the near-term upside for Keppel's shares could be capped by operational headwinds, with the state investment firm's withdrawal removing an "imminent catalyst". That being said, DBS remains "sanguine" on Keppel's longer-term prospects.

DBS's lower target price for Keppel comes as the analyst has lowered the property valuation to 0.9 times P/BV, from 1.0 times previously.

"Our target price implies about 1.0 times of FY20 P/BV, which seems fair against an 8 per cent return on equity (ROE) with an about 3 per cent dividend yield in 2021," Ms Ho wrote. She added that further re-rating will require more evidence of a business turnaround and ROE enhancement towards the group's target of 15 per cent.

As for what the good entry points could be, Ms Ho pointed out that Keppel shares fell to S$5.18 after reporting weak Q2 2020 results. The counter also hit a low of S$4.93 in March this year during the wider market sell-off triggered by coronavirus pandemic fears. "During the last oil crisis, the P/BV trough was around 0.8 times in 2016, which translates to about S$4.70, based on estimated book value per share of S$5.87 for FY20," she added.

KGI Securities analyst Joel Ng told The Business Times on Monday that Temasek's "outright" withdrawal was a surprise, as his base case was that Temasek would revise its offer price.

Although the withdrawal will push Keppel's share price downwards in the short term, KGI expects this to be a buying opportunity, Mr Ng said. "Keppel has done a good job diversifying beyond O&M over the past decade, such as into data centres and sustainable urban development projects," he added.

Separately, DBS's Ms Ho on Tuesday said that key downside risks to the research team's forecasts on Keppel are lower-than-expected en bloc sales, as well as disappointing offshore and marine orders. 

En bloc sales, which are lumpy by nature, accounted for more than half of Keppel's property profit in 2018 but only 10 per cent in 2019, the analyst noted. DBS also predicts annual revenues from Keppel O&M will fall to the S$2-3 billion level per annum in FY20-21, versus S$7-8 billion in FY12-14.