Hot stocks: Keppel soars 16%, SembMarine up 2% on the back of Temasek bid

SHARES in Keppel Corp and Sembcorp Marine (SembMarine) rallied strongly on Tuesday morning, as investors digested news that Singapore's state-owned investment firm Temasek had made a surprise S$4 billion partial offer for Keppel - potentially raising its stake in the conglomerate to 51 per cent, and reigniting market speculation that there might soon be a consolidation in Singapore's offshore and marine (O&M) sector.

As at 10.35am on Tuesday, Keppel shares soared 15.9 per cent, or S$0.93 to S$6.77. The counter traded within a day range of S$6.61 to S$6.84, edging close to its 52-week high of S$6.97. Some 19.6 million shares changed hands, making it one of the most heavily traded counters on the Singapore bourse for the day.

Meanwhile, shares in SembMarine jumped 1.5 per cent, or two Singapore cents to S$1.36, with some 11.3 million shares changing hands. The counter traded within a price range of S$1.35 to S$1.41 for the day, but was below its 52-week high of S$1.90.

CIMB has issued a "hold" rating on SembMarine with a price target of S$1.26, while Credit Suisse has a "underperform" recommendation on the stock, with a price target of S$1.10.

With trading in Keppel's stock halted on Monday, it was announced that Temasek had made a partial offer to scoop up an additional 30.55 per cent of shares in Keppel for S$7.35 each. This represents a 26 per cent premium ( see amendment note) or S$1.51 over its last traded price of S$5.84 on Oct 18; the offer is also 21 per cent higher than its three-month volume-weighted average price.

BT reported on Tuesday that analysts by and large deemed Temasek's bid to gain control of Keppel through wholly-owned Kyanite Investment Holdings "reasonable", given that the offer price is close to their fair-value estimates of Keppel's shares.

Adrian Loh of UOB Kay Hian said: "It appears to be fair, as it's about 3.5 per cent lower than our target price of S$7.61 for Keppel."

Similarly, OCBC's research team on Tuesday highlighted that Temasek's offer price is just 3 per cent lower than its fair value estimate of S$7.58 for Keppel.

The OCBC analysts said: "There has long been talk of a potential restructuring of businesses under the Keppel Corp and Sembcorp Industries stable, such as the merging of the O&M yards. This announcement of a partial offer, if successful, allows Temasek to exercise control over Keppel. A strategic review of businesses can be undertaken post the successful partial offer, and it sets in motion a series of potential transactions that may happen, though the whole process may take some time.

"Overall, we view this as a positive development as Temasek is taking a proactive approach in reviewing its portfolio and investments for the longer term. We maintain our fair value estimate of S$7.58 on the stock."

Both RHB Research and CIMB have also issued "buy" recommendations on Keppel - RHB Research has a price target of S$7.80 on the counter, while CIMB is more optimistic with a S$8.36 price target as at Oct 22.

Temasek on Monday announced it does not intend to delist or privatise Keppel, and that the counter will remain listed on the Singapore Exchange. It added that the offer price provides a chance for Keppel's shareholders to monetise part or potentially all their investment in the conglomerate.

A pivotal part of Monday's announcement is that, following the offer's successful close, Temasek said it will work with Keppel's board on a "comprehensive strategic review" to create sustainable shareholder value, BT reported.

KGI Securities analyst Joel Ng noted: "In our view, this is a prelude to the much-needed consolidation of Singapore's O&M sector. The controlling stake in both Sembcorp Industries and Keppel Corp would give Temasek the flexibility to shape the consolidation."

Separately, BT also noted that Temasek's move to gain a controlling stake in Keppel is fuelling years-long intermittent market speculation of a merger of Singapore's two major shipyards - Keppel Offshore and Marine (Keppel O&M) and SembMarine - or even the privatisation of the latter.

Maritime, inclusive of the O&M sector, contributes about 7 per cent of Singapore's gross domestic product. While the depths of the post-2014 downturn seem to be behind the industry, oil prices are still volatile.

Over the years, SembMarine has continued to focus on the offshore business, with aggressive bids for contracts in a shrinking market.

Keppel, on the other hand, has taken a more diversified approach with investments in property and infrastructure. Its balance sheet is significantly stronger, and is seen in a better position to weather the storm.

As at Monday, SembMarine's market value stood at S$2.8 billion, while Keppel has a market cap of S$10.6 billion.

Amendment note: An earlier version of this story incorrectly said that Temasek's offer represents a 16 per cent premium over the counter's trading price of S$5.84 on Oct 18. It is in fact a 26 per cent premium, and the article above has been revised to reflect this.