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Keppel soars on Temasek's wings, lifting STI along

The promise of restructuring to transform the business behind the share-price boost

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The stock price of Keppel Corp posted its largest intraday gain in over 20 years on Tuesday, lifting with it some stocks linked to Temasek Holdings and the blue-chip Straits Times Index (STI), a day after the Singapore investment company made a bid for a controlling stake in the diversified marine conglomerate.

Singapore

THE stock price of Keppel Corp posted its largest intraday gain in over 20 years on Tuesday, lifting with it some stocks linked to Temasek Holdings and the blue-chip Straits Times Index (STI), a day after the Singapore investment company made a bid for a controlling stake in the diversified marine conglomerate.

Margaret Yang, a market analyst at CMC Markets in Singapore, said: "Singapore's market had one of its best trading sessions yesterday, emboldened by Temasek's partial offer to acquire an additional 30.6 per cent stake in Keppel."

Other quasi state-owned companies such as Singtel also got a boost. The telco, which is 52 per cent owned by Temasek, jumped to its highest in almost six weeks, hitting an intraday high of S$3.29 before settling at S$3.26, up four cents, or 1.24 per cent.

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Analysts said the latest rally reflects the market's belief that Singapore blue chips may be undervalued, and that there may be long-term value within them that can be extracted from potential strategic reviews.

The restructuring of Keppel, whose interests spans offshore and marine (O&M), property, infrastructure, asset management, urban solutions and telecoms via M1, could cough up many options for other Temasek-related companies as well.

Jason Yeo, an analyst at Goldman Sachs who is keeping a "Buy" on Keppel and a target price of S$7.40, said: "Keppel should now be viewed more holistically, amid efforts to transform the business, rather than just as a proxy for the O&M business."

Keppel surged on this restructuring theme on Tuesday, when its trading halt was lifted a day after Temasek - which has a 20.45 per cent stake in Keppel - said it was offering S$7.35 a share in cash for an additional 30.6 per cent stake in Keppel for a controlling 51 per cent stake. The price represents a premium of 26 per cent or S$1.51 over its last traded price of S$5.84 before trading was halted.

Keppel's shares soared as much as 17 per cent, its biggest intraday gain since 1998, on volumes 5.4 times its three-month average, according to Bloomberg data. It eventually closed at S$6.68 a share, up 84 Singapore cents, or 14.38 per cent. A staggering 33.5 million shares worth S$225.6 million changed hands.

Keppel led gainers in the blue-chip Straits Times Index (STI), which hit an intraday high of 3,173.70, before ending the day at 3,160.67, up 21.52 points, or 0.69 per cent from Monday.

Temasek, one of the largest institutional investors in the world, said it intends to work with Keppel's board to undertake a strategic review to refocus and strengthen certain businesses.

The move has fuelled decades-long speculation of a possible merger between Keppel's offshore and marine operations and its rival, Sembcorp Marine. Temasek has a 49.5 per cent interest in Sembcorp Industries, parent of Sembcorp Marine.

Sembcorp Industries hit S$2.32 before closing at S$2.23, down six cents or 2.6 per cent. Sembcorp Marine rose to an intraday high of S$1.41, before settling at S$1.35, up a cent or 0.75 per cent.

Citi analyst Kwok Wei Chang said: "The strategic review outcome is likely to be comprehensive, given the possibility of appointing new directors to the Keppel board."

He reckoned that besides the possible sale of assets, the focus would be on the unit which is deemed to be undervalued, that is, the O&M one.

"Having endured the downturn and taking the necessary steps to streamline the business (mothballing of yards, tailoring of workforce resulting in a leaner cost structure), O&M looks poised to ride the cyclical recovery, driven by improvements seen in the offshore production space."

He added that Keppel's fundamentals remain unchanged, with the offer of S$7.35 a share creating a price floor for the stock.

Ms Yang noted that while Keppel's shares soared, they are still some 10 per cent below Temasek's offer price.

"This reflects uncertainties in closing this deal. Each of the pre-conditions, including gaining regulatory approval, Keppel's financial performance and a majority approval by Keppel's shareholders, needs to be satisfied by Oct 21, 2020, in order for the offer to be made," she said.

Analysts noted that it is a year to the long-stop date, and market conditions are fluid.

Arun George, an insight provider at Smartkarma, said Keppel shareholders would be better placed holding on to their shares as Temasek's offer is far from compelling.

"The deal seems unexciting on a sum-of-the-parts valuation and historical trading multiples," he said.

Key downside risks for Keppel include a further decline in global oil prices (which could hit demand for offshore drilling equipment and earnings at the O&M unit), an economic slowdown, changes in government policies, sharp interest rate hikes in Singapore or China (which could affect Keppel's property businesses in these countries), slippages in offshore/infrastructure contracts under execution that could lead to penalties/losses, and overpaying for acquisitions.