3 Reasons to Like Temasek’s Partial Acquisition of Keppel Corporation Limited
Keppel Corporation Limited (SGX: BN4) is a conglomerate with three main business divisions: offshore and marine, property, and infrastructure. The group is one of the largest builders of oil rigs in the world, and it also deal with shipbuilding and ship repair and conversion. Its property arm under Keppel Land manages property development and investments, while its infrastructure division is engaged in power generation, logistics, and data centres.
In a surprising development, a subsidiary of Temasek Holdings (Kyanite Investment Holdings) announced on October 21 that it would be making a partial cash offer for 30.55% of Keppel at S$7.35 per share. Temasek currently owns 20.45% of Keppel, and the intention for the offer was to raise Temasek’s stake in Keppel to 51%, allowing it control over the group. The intention is for Keppel to stay listed, and there is also a list of conditions to be fulfilled before the offer can go through.
After scrutinising this announcement, it seems there are many reasons to like this partial acquisition. Here are three of them.
1. An undervalued stock
Keppel was trading at S$5.84 before the announcement, and the offer price represented a premium of 25.8%. Temasek obviously feels the shares are undervalued or it wouldn’t have offered such a good premium to the last traded price. This seems to show that Keppel has qualities that may not be fully appreciated by the investment community, and that their shares have been depressed for quite some time due to troubles in the oil and gas industry. Temasek, being a seasoned investor, is able to spot value in the group, which is a positive sign for investors who still believe in the group’s merits.
2. Better performance for offshore and marine
Source: Keppel Corporation’s 3Q 2019 Earnings Presentation Slides
Temasek was probably attracted to Keppel because of the latter’s improved offshore and marine performance. For 9M 2019, the division reported a net profit of S$18 million, reversing a net loss of S$38 million in the same period last year. Also, Keppel’s new orders of S$1.88 billion received in 9M 2019 (from the graph above) have already surpassed the total new orders for the entire 2018. Net order book is now at S$5.1 billion as of the end of September 2019, higher than the S$4.3 billion at the end of 2018.
I believe Temasek sees further growth potential for Keppel’s offshore and marine division and has decided to take a larger stake in the group in order to ride the recovery wave within the sector.
3. Strategic review to unlock further value
Investors probably know Temasek is a veteran when it comes to evaluating investment opportunities, though the state-owned firm usually takes a back seat when it comes to operational matters as it prefers to be a passive investor. However, Keppel has announced that it will work with Temasek to undertake a strategic review of the group in order to unlock further value for shareholders.
To me, this seems to imply there are more opportunities for value to be realised and that there is still latent potential in Keppel that could be tapped.
Time will tell
To be fair, only time will tell if Keppel can continue to grow and improve its business performance. But with this partial offer, it seems to signal confidence in the group’s prospects and its long-term future.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.