Temasek's plans for Keppel still intact

THE Covid-19 outbreak has cast a pall on global economies and stock markets, making it even harder to do business or make investment decisions. But for shareholders of Keppel Corp, it has presented an unexpected windfall - at least on paper.

Last October, Temasek Holdings said it would be making a voluntary pre-conditional partial offer of S$7.35 a share for an additional 30.55 per cent stake in Keppel through Kyanite Investment Holdings.

Temasek already owns 20.45 per cent of Keppel. If successful, the offer will take its stake to 51 per cent. The offer price of S$7.35 represented a premium of about 26 per cent over the last traded price of S$5.84 and a premium of about 21 per cent over the volume weighted average price of S$6.07.

The market was divided. Some were happy given that Keppel's share price had been depressed by troubles at its offshore and marine (O&M) division. Others felt it undervalued the diversified marine conglomerate, which also boasts operations in property, infrastructure and other investments.

But this week, Keppel's share price took a major beating as stock markets around the world tanked. The virus has spread rapidly beyond Asia, to Europe and the US. US president Donald Trump has suspended all travel from Europe to the US for the next 30 days.

Adding to Keppel's difficulties, oil prices have collapsed as Saudi Arabia kicked off a price war. The oil producing nation slashed prices and threatened a production increase to punish Russia for rejecting a supply cut arrangement. Joining the price war is United Arab Emirates (UAE), the third largest producer among the Organization of the Petroleum Exporting Countries.

On Thursday, Keppel hit S$5.17, a price last seen in 2016.

The large difference between Keppel's current share price and Temasek's offer price has raised speculation over whether Temasek is still keen to proceed with its plans and whether it will review its proposed offer.

The Business Times understands that, as of now, the price still stands at S$7.35 and the offeror's original intention remains unchanged. When Temasek made its announcement in October, Keppel was trading at S$5.84 a share, which is not far off current levels.

The partial offer has not been launched. BT understands the parties involved are in the midst of clearing the pre-conditions. The formal offer will not be made unless each of the pre-conditions is satisfied or waived at the discretion of the offeror by Oct 21, 2020.

Apart from regulatory and other consents, there must be no material adverse change in Keppel's provisions for proceedings. Also, its net asset value cannot fall by 10 per cent or more from the S$6.06 a share recorded in its last financials. And, Keppel's cumulative net profit after tax (PAT) but before non-controlling interest must not fall 20 per cent or more from S$696 million.

Oct 21 deadline months away

Although the present environment creates uncertainty about Keppel's financial performance, the Oct 21 deadline is still seven months away.

Will the present pandemic be over before then? Historically, severe epidemics tend to pass quickly while milder ones persist over a longer period. There is also some debate about whether warmer weather will halt Covid-19's spread.

For now, Keppel is on track to meeting the "no material adverse change" pre-conditions. Its non-O&M businesses continue to do well. And as at end-December, it had an O&M order book of S$4.4 billion -- its highest year-end level since 2015. Gas and renewables-related work collectively account for 70 per cent of the backlog.

One potential risk is Keppel's investment in associate Floatel, which had a carrying value of S$477 million in December. This could be susceptible to further write-downs if Floatel loses its going concern status. But Citi analyst Kwok Wei Chang says Floatel has initiated discussions with key creditors, with the board having reasonable expectations of success.

If anything, the market volatility and uncertainty reinforce Temasek's decision to acquire a larger chunk of Keppel. Temasek plans to work with Keppel's board to undertake a comprehensive strategic review to create sustainable value for shareholders. But this will take time - perhaps years - to achieve.

Meanwhile, for existing Keppel shareholders, Temasek's offer would represent a good opportunity to cash out.