Shares of Keppel Corp sank yesterday, amid uncertainty over the fate of Temasek's $4.1 billion takeover offer for the loss-making conglomerate. The stock closed at $5.18, down 22 cents or 4.1 per cent, with 8.13 million shares changing hands.
Over the weekend, Morgan Stanley Asia (Singapore) said Temasek will decide by the end of this month whether to invoke the material adverse change (MAC) clause in its partial offer for Keppel.
The conglomerate last Thursday posted a record quarterly net loss of $697.6 million for the second quarter, dragged by a massive $919 million impairment, breaching certain conditions for the offer.
Under the MAC clause, Keppel's profit after tax must not fall by more than 20 per cent or about $557 million over the cumulative four quarters from the third quarter of last year.
Given the MAC non-fulfilment, Temasek now has three options - waive the breach and continue with the cash offer at the $7.35 per share price, invoke the MAC clause and walk away from the deal entirely, or lower the offer price with the approval of the Security Industry Council.
If completed, the pre-conditional partial offer would raise the investment firm's stake in the conglomerate to 51 per cent, giving Temasek control of Keppel. Temasek, which already owns about one-fifth of Keppel, announced the offer last October.
Analysts have maintained their "buy" or "add" recommendations on Keppel, although they reduced their target prices on the stock.
CGS-CIMB slashed its target price to $6.46, from $7.48 previously, while keeping its "add" rating.
Analyst Lim Siew Khee wrote last Friday: "We believe the current share price has factored in some risk of deal cancellation."
If Temasek walks away from the deal, Keppel's share price could react in a shock and touch its previous trough of 0.82 times price to book value in early 2016 during the last oil crisis, or $4.88, Ms Lim added.
DBS Group Research analyst Ho Pei Hwa yesterday pointed out that there is now uncertainty regarding Temasek's partial offer.
With Keppel's latest results, the 12-month trailing profit after tax now stands at a loss of $165 million and will require $887 million in profit after tax in the third quarter of this year in order to meet the MAC clause. "This seems rather unrealistic, given the average quarterly profit of $200 million over the past four years," Ms Ho said.
DBS, which has a "buy" call on the stock, lowered its 12-month price target to $6.40, from $6.80.
UOB Kay Hian said it remained "reasonably confident" Temasek will continue with the offer, albeit likely at a lower offer price.
UOB Kay Hian analyst Adrian Loh noted that the extraordinary general meetings for Sembcorp Industries and Sembcorp Marine's proposed rights issue and demerger will take place next Tuesday.
Should these two firms' shareholders vote for the demerger, the likelihood of Temasek going forward with the Keppel partial offer will be "much higher", in the brokerage's view, Mr Loh said.
"At the end of the day, the game plan to create a single Singapore-based O&M (offshore and marine) company to compete with the likes of the Korean or Chinese O&M behemoths makes economic sense, and is better carried out during a cycle trough rather than mid or peak cycle," he said.
UOB Kay Hian lowered its target price on Keppel to $7.10, from $7.15, while maintaining its "buy" rating.
KGI Securities research head Joel Ng said yesterday: "We still believe that Temasek will drive the consolidation of Singapore's O&M sector, and that the deal will likely go through."
This comes as the global O&M industry is undergoing significant structural shifts, exacerbated by the Covid-19 pandemic.
Mr Ng said: "Furthermore, cost reductions in the O&M sector are limited this time around, given that most of the efficiency gains occurred in 2015-2018.
"Therefore, there is no choice but to consolidate and lay the proper groundwork to capitalise on long-term industry trends."
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