Keppel sees selloff after Temasek walks away from deal

Singapore

KEPPEL Corp shares were dragged down on Tuesday as investors were on edge after the surprise announcement that Temasek Holdings has scrapped its S$4 billion partial offer for the conglomerate.

Within the first minute of the opening bell, Keppel sank nearly 13 per cent or S$0.69 to a low of S$4.71. It clawed back some losses to finish at S$4.80, down 11.1 per cent or S$0.60 from Friday. This is the counter's weakest close in more than four years - the last time it ended trading below this level was in February 2016, according to Shareinvestor data.

The stock is down 19.3 per cent since Keppel flagged a hit to its second-quarter profits on July 24.

About 31.8 million shares changed hands on Tuesday, making Keppel the second-most actively traded by value on the Singapore bourse after DBS. Keppel was also the worst performer on the benchmark Straits Times Index for the day.

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. Bloomberg reported that Credit Suisse Group and Macquarie Group also downgraded their ratings on the counter.

On Monday, 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.

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".

DBS's Ms Ho noted that the near-term upside for Keppel's shares could be capped by operational headwinds, with the investment firm's withdrawal removing an "imminent catalyst". But 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 one 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 said.

OCBC Investment Research, meanwhile, wrote that traders could eye Keppel's recent trough levels of S$4.82 in March 2020 - during the wider market selloff triggered by novel coronavirus pandemic fears - as well as around S$4.70 in early 2016 during the previous oil crisis.

"However, any shorting activity by short-sellers could also cause the price to overshoot on the downside," OCBC analysts said in a report on Tuesday. The research team sees value in the stock, and has a "buy" rating and a S$6.40 fair value.

Bloomberg reported that Oh Jin Rui, a director at United First Partners, said Temasek's withdrawal has set a precedent of the state investor walking away from deals on account of the MAC clause. Investors need to be "more wary of such pre-conditional deals going forward", he added.

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 she believes the share price weakness already factored in some risk of deal cancellation. She added that it was "not unreasonable" for Temasek to walk away, given that the investment firm would have had to fork out S$7.35 per share for the additional 30.55 per cent stake in Keppel.