Temasek's slower pace of global investments trains spotlight at home

Singapore

AS stock markets climbed a wall of worry over the last year, Temasek Holdings has been spending less on new investments around the world, while extracting more value from its existing portfolio at home.

Direct equity investments by Temasek peaked at US$6.13 billion in the second quarter last year, boosted by a three billion euro (S$4.8 billion) injection into Bayer, going by estimates by the Sovereign Wealth Center (SWC) in London.

Daniel Brett, who heads research at the SWC, told The Business Times last week: "Since then, we have observed a steady downward trend in total direct-investment deal value, which hit a low point of US$0.75 billion in the first quarter this year."

At his last count, Temasek's total public and private equity deals reached US$0.88 billion this quarter. The data excludes a S$3 billion add-on investment in CapitaLand arising from the sale of Ascendas-Singbridge, which is yet to be completed.

The state investment firm has already explained its thinking. Executives said a year ago that they were "generally positive" about the year ahead, though trade tensions and the chance of a US recession had risen.

Temasek's managing director of investment Alpin Mehta had warned at the annual Temasek Review last July: "Given the market outlook, we may recalibrate and slow our investment pace over the next nine to 18 months."

Temasek has trimmed some of its equity positions since then. It cut its shareholding in Alibaba by 27 per cent between end-March 2018 and end-March 2019, public filings show, amid a 30 per cent share slump over the second half of 2018.

The firm is also treading with care in the crowded private equity markets. But it has not pulled back from its commitment to grow its footprint in India, and is looking increasingly to India for tech, infrastructure and logistics targets, said Mr Brett. "India is also more insulated from global volatility, which Temasek appears to be actively avoiding," he added.

Incidentally, even as Temasek has tempered its investment pace, it has been working its own assets harder in the last year. This approach is consistent with what any sovereign investor would do when slowing global growth makes investments more tricky, said CIMB Private Banking economist Song Seng Wun: "When you have so much resources to deploy, you can't be sitting there holding cash or just cutting back itself.

"The global growth cycle is getting a bit tired, and so many risks have materialised. What does that mean for companies? Prudent long-term investors, while mindful of medium-term risks, their eyes would be on longer-term opportunities because long-term growth remains intact," he said.

"It is really this backdrop which forces them to relook at what needs to be re-jigged for the longer-term opportunities coming through, (and to consider) whether corporate action can lead to a larger unit that can capitalise on the opportunities at a cost that is attractive enough."

Temasek is the common factor in CapitaLand's proposed acquisition of Ascendas-Singbridge. It owns 40 per cent of CapitaLand while Ascendas-Singbridge is its subsidiary.

The deal, expected to be completed by the end of this month, will lift CapitaLand's return on equity and release S$3 billion in cash to Temasek; Temasek will also receive S$3 billion worth of shares in the enlarged CapitaLand at S$3.50 apiece.

One investment banker said: "I think Temasek is doing a good job of being nimble with their portfolio... There is a bit of a sense that they are putting incremental dollars to work."

Some have observed the same in Temasek subsidiary Azalea.

Following the issuance of US$501 million worth of Astrea IV collateralised fund obligations (CFOs) backed by a US$1.1 billion portfolio last June, Azalea recently returned to issue another US$600 million Astrea V bonds backed by a US$1.3 billion portfolio of private equity (PE) funds.

Firms typically use CFOs to reduce their balance sheet exposures to an asset class while keeping the upside.

To be sure, these deals are relatively tiny when seen against Temasek's net portfolio value of more than S$308 billion, and Temasek's stated aim is to offer investors diversification.

It has also been securitising parts of its private equity portfolio since 2006 with the launch of Astrea I, observed Patrick Schena, co-head of SovereigNet at Tufts University's Fletcher School.

"Like most collateralised securities, they went out of favour during and after the financial crisis and, like other types of collateralised vehicles, they are making a sort of comeback," he said.

Besides CapitaLand, Temasek has featured in another large corporate action by a Temasek linked-company (TLC) this year.

Last Friday, Temasek lent a hand to address balance sheet concerns at Sembcorp Marine, supporting a S$1.5 billion bond sale by parent Sembcorp Industries. The proceeds will be on-lent to the shipyard.

While the Temasek connection can hardly be said to have lit a fire under CapitaLand, Sembcorp Industries or SembMarine, hopeful punters may point to Standard Chartered.

The bank's shares rallied after it said at the end of April that it would start buying back its stock again, for the first time in more than 20 years. The move came on the back of reports earlier this year that Temasek was stepping up pressure on the long-time underperformer.

Speculation over what this or that TLC could do to enhance value is stirring once more.

Asked if there is value in trying to anticipate if Temasek will drive more corporate action, Joel Ng, head of Singapore research at KGI Securities, told BT to start with the market laggards: "I think a key reason driving the increase in corporate action is due to the underperformance of the Straits Times Index (STI) against global benchmarks. The STI's one-year and five-year annualised returns have underperformed most US, Europe and Asia indices."

Mr Ng suggested that Asian Pay Television Trust (APTT) and Hutchison Port Holdings Trust (HPHT) may be due for corporate action. Both stocks have lost between 30 and 50 per cent of their market value over the last five years. He said: "Temasek is the largest shareholder of APTT, which is undertaking an independent strategic review."

But an investment banker from a different firm was less certain about HPHT: "It should be privatised. Every bank has pitched the idea." However, the decision ultimately lies with major shareholder CK Hutchison, this banker noted.

On and off, talk of a merger between SembMarine and Keppel's offshore and marine business has surfaced.

CGS-CIMB head of research Lim Siew Khee said he believes a merger makes sense: "Ideally, SCI should just do utilities and Keppel should just do asset recycling."

But this is not likely in the next two years, she said. SembMarine needs to first strengthen its balance sheet.

Another question that analysts have posed before is whether there is a good case for Singapore Airlines to take SIA Engineering Company private.

SIA already controls SIAEC through a 77.8 per cent stake, so there may be little incentive for them to privatise unless they want to save that 20 per cent leakage, one argument goes.

But then again, the market was caught by surprise when Keppel Corp launched a privatisation offer for 79.2 per cent-owned Keppel Telecommunications and Transportation last September, so it remains a possibility, Ms Lim said.

In the telco space, Keppel has already taken M1 private for reasons that are not obvious to the casual observer, but M1 is still locked in a fight with StarHub and Singtel, and all three Temasek-linked telcos have to compete against international players in the cyber security and enterprise computing solutions space.

Mr Ng said: "They are laying the building blocks to compete eventually, but I don't see them having the scale necessary to be able to command higher margins and earnings growth in the next one to two years."

That said, Temasek is probably comfortable waiting. It has always emphasised that it has a large, diversified portfolio and a long investment horizon.

As for its global strategy, it would be interesting to see how the state investor's directives may change as the market signals lower interest rates while the US-China battle for tech supremacy deepens. Investors will be looking to the upcoming Temasek Review in July for hints.