Tech firms, industrial Reits to ride on M&A wave sweeping Singapore: DBS

Mergers and acquisitions (M&A) and privatisations are heating up in Singapore, with 14 companies being taken private or bought out to date this year, much higher than for the whole of 2018.
Mergers and acquisitions (M&A) and privatisations are heating up in Singapore, with 14 companies being taken private or bought out to date this year, much higher than for the whole of 2018.PHOTO: REUTERS

SINGAPORE - Mergers and acquisitions (M&A) and privatisations are heating up in Singapore, with 14 companies being taken private or bought out to date this year.

In a report identifying more possible deals in the space, DBS Group Research analyst Ling Lee Keng said on Tuesday (July 2) that this number is "much higher" than the whole of last year, and also exceeds the deals done in 2017, when the M&A and privatisation theme was in focus as well.

According to data compiled by DBS, there were around eight key privatisation and takeover offers announced in 2018, and an estimated 14 announced in 2017, including four that did not go through.

Data from Mergermarket on Wednesday also showed Singapore bucking the regional M&A downtrend, recording US$17.1 billion in deals in the first half of this year, up 154 per cent from a year ago.

Recent premiums offered on M&A and privatisations here have been attractive, DBS's Ms Ling said.

Companies that were privatised or delisted in the last three years were transacted at an average premium of 15 per cent over their last transacted prices before the deals were announced.

The premium for 2019 year-to-date is the highest at 20 per cent, compared to 10 per cent in 2018 and 12 per cent in 2017.

This gives shareholders an opportunity to liquidate and realise their entire investment, often at a premium to the prevailing market price, an option which may not otherwise materialise, Ms Ling noted.

 
 

Real estate investment trusts (Reits) as well as companies in the technology, food and beverage (F&B) and healthcare sectors are likely to ride on this M&A and privatisation wave in Singapore, she said in the report.

Separately, SIA Engineering's share price spiked on Friday morning, which two other DBS analysts said could have been fuelled by renewed talk that Singapore Airlines may privatise the company.

In the industrial Reits space, the merger of OUE Commercial Reit and OUE Hospitality Trust is a sign that Reit managers are taking strategic steps towards increasing their assets under management and market capitalisation to gain visibility among investor, Ms Ling said on Tuesday.

DBS expects this trend of mergers to continue, especially for mid-cap industrial Reits such as AIMS APAC Reit, Cache Logistics Trust and Soilbuild Business Space Reit. These three Reits are trading at attractive yields in excess of 7 per cent to 8.5 per cent, which prohibits them from pursuing accretive acquisitions, given its high cost of capital, Ms Ling said.

For tech stocks, suppliers will need to relook their strategies to survive in the challenging trading environment, given that margins have been hit and visibility remains low amid the cloudy outlook stemming from the trade war.

She predicted that Hi-P International, Fu Yu, Spindex and Sunningdale will be potential targets in the tech sector.

 
 
 

F&B companies with strong brand equity are also highly sought after. Fruits distributor SunMoon Food, bread manufacturer QAF Limited and chocolate maker Delfi Limited may be on the radar screen of potential buyers for this reason, according to DBS.

In the healthcare sector, smaller-listed players could consolidate to address key-man risk and offer a wider range of better services. Ms Ling noted that companies fitting this bill include specialised medical services provider Singapore O&G, eye care provider ISEC, oncology and stem-cell firm Talkmed, and Asian Healthcare Specialists (AHS), which provides orthopaedic, trauma and sports services.

Days after her Tuesday report, AHS announced on Friday morning that it is eyeing a 51 per cent stake in Cornerstone Asia Health. The cost of acquisition will be around 13 times the profit after tax for Cornerstone's fiscal 2019.

Ms Ling also expects the following companies to optimise their structures to maximise returns: entertainment firm mm2 Asia, vehicle inspection group Vicom, public transport operator SBS Transit, and property development and engineering group United Engineers Limited.

DBS Group Research's previous speculations of M&A deals have held true for Courts Asia, Nobel Design and PCI, which it had identified in 2017 as potential targets.