Keppel Corporation

[Background – It has been extremely tumultuous for Keppel Corp (Keppel Corporation) in the past 12 months. Its share price has been going through huge swings both in the up and down directions. Until very recently, the general share price movement of Keppel Corp has been in a down trend. At its worst position, the share price was just above $4 per share, down about 30% from its steady state price of between $6 and $6.50 level made 12 months ago. What caused the huge swings in its share price? First there was an offer by Temasek Holdings (TH) made about 12 months ago. TH made a partial offer to buy 30.55% of Keppel Corporation that it did not own at $7.35 per share. The total cost to TH was expected to be about $4 billion. The offer was to proceed in about 12 months from then.  That news itself caused Keppel Corp shares to jump up by about $0.90 from $5.84 to $6.75. This share price level held almost steady for about 3 months. Then came the beginning of the Covid-19 pandemic, which saw the oil price crashed below zero, leading Keppel Corp’s share price to dive from more than $6.50 per share to almost $5. Then as the crude oil price normalised to about $40 per barrel, Keppel’s share price also correspondingly moved up from $5 to about $6 per share. It held at that price for about 2 months (between May and July 2020) but the saga did not end there. Just three month ago, Keppel Corp took a bold step to make a huge impairment of $919m on its assets, resulting in a significant loss of S$698m for Q2 2020. The offshore & marine unit, itself, accounted for S$889million of the $919 million impairment. This resulted in about $0.50 drop in the share price from $5.90 to about $5.40. Following Q2 loss due to the asset impairment, TH decided to invoke the Material Adverse Change (MAC) clause in its original partial offer. With TH’s partial offer fallen through, Keppel Corp’s share price tanked all the way down from $5.40 to $4.10 at its lowest in end September. For more than a month since then, the share price had been languishing at $4.50 and below. And suddenly, within a matter of 2 weeks, it clawed back about 16% to above $5 per share as of today.]    

Why was Keppel Corp share price so co-related to crude oil price?

For a long time, the O&M division has been the flagship business unit of Keppel Corp. Despite being a conglomerate with property and investment arms, its revenue & profitability were derived mainly from the profit & loss of its O&M division. Up until the full acquisition of Keppel Land in 2015, the O&M division could easily account for more than 50% of Keppel Corp’s profit and sales revenue. Due to this historical fact, Keppel Corp share price even until today still has high a co-relationship with the crude oil price movement.

The business environment      

Unfortunately, the global developments in shale oil extraction and the recent innovations have made the world become less reliant on fossil fuel. These developments have put a lid on the crude oil price, and certainly, snapped the business of deep-sea oil exploration and extraction, which is a more expensive venture.  Sembcorp Marine (SMM), which recently came directly under TH, as well as the Offshore and Marine (O&M) subsidiary of Keppel Corporation are specialists in the designs and fabrications of offshore infrastructures and vehicles. As a result of these developments, the two industrial entities have not been doing well in the few years. Their prospects going into the future remain very uncertain.

Temasek Holding’s offer

Given the unfavourable business environment for the two corporate entities, Temasek Holding (TH) proactively undertook to seek control over them. Although TH did not publicly announce its intention after seeking control of the two corporate entities, it was widely expected that there should be some kind of consolidation between the two. In the process, TH had already successfully taken over the control of SMM from SMI. Pending some pre-conditions made on its offer, TH was to take a majority holding of Keppel Corp by buying 30.55% of Keppel Corp shares that it did not own from the existing shareholders at a price of $7.35 per share. The execution was to take place about in a year’s time after the offer. Meanwhile, Keppel Corp was to carry out some ‘house-cleaning’, in particular the Offshore and Marine (O&M) division, under the Keppel group before TH decides to proceed with the offer.

In Q2 2020, Keppel Corporation carried out a huge impairment of $919m, of which $889m came from the O&M division. This resulted in a total loss of S$698m for Q2 2020. The components that made up the huge impairment were mainly in the undelivered assets, doubtful debts, incomplete projects and deferred orders. The huge impairment apparently triggered the MAC leading TH to pull the plug, causing Keppel Corporation share price to plunge from about $5.40 to close to $4.00 at its lowest in the next 1½ months till end September 2020. With no support and earning visibility in sight, SMM share price also tanked to $0.12. I believe TH’s withdrawal from the deal is likely due to a change of priorities brought about by Covid-19 that TH had to contend with. Perhaps, it is only a postponement as there were more pressing issues to be resolved in the amidst the pandemic. I believe things would only happen when we get into the TH’s next financial year. In all likelihood, TH may offer a lower offer price in view that Keppel Corp share price has been battered to some extent until recently.

Where was the real excitement?

Interestingly, the developments of all these events caused significant ups and downs in the Keppel share price. When the partial offer by TH was made in the last quarter of 2019, the share price went up by $0.90. When the crude oil price collapsed in March 2020 amidst the Covid-19 pandemic, the share price plunged more than $1.50. When the crude oil price normalised to about $40 per barrel, Keppel share price advanced about $1 from $5 per share to $6 per share.

When Keppel Corp made the huge impairment of $919m in Q2 2020, the share price took a hit of about $0.50 from $5.90 to $5.40. When TH invoked the MAC to withdraw its offer, the share price plunged further. This time even more significant from $5.40 to $4.10 at its lowest. Within that short period, Keppel Corp share price was slapped twice, so much so that there was a big disparity between its price and value. Either the market was too pessimistic about the prospects of Keppel Corp or there were too many short sellers trying to make some quick gains from the weakening price. In fact, judging by the huge descend in the share price, it has effectively ring-fenced the O&M division out of the conglomerate based on the sum-of-parts valuation.  

Actually, if we go by the fact that Keppel share price advanced $0.90 when TH made the partial offer, we should expect the share price to decline by the same extent when TH withdrew the offer.  The drop of $1.30 from $5.40 to $4.10 was certainly overdone in hindsight. Furthermore, looking from an observer point of view, the impairment exercise might not be entirely a bad thing. It cleaned up the balance sheet and eradicated the non-performing assets making it more lean for the future. These are non-cash items. If Keppel Corp wins any future O&M projects or any sale of these assets, it should be favourable for the Keppel Corp’s share price.                 

Up until two weeks ago, Keppel Corp share price still continued to lag. When I made the last purchase of Keppel Corp share price, I was still able to modify the purchase price by lowering 2 cents, and yet a kind soul still offered me his shares at $4.34, showing how pessimistic the market was. The market sentiment changed almost completely within a matter of 10 trading days. Hopefully, Keppel Corp’s share price can fare better going into the next year.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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