SHARES of Keppel Corp tumbled in early trade on Monday, amid a broad market decline on the Singapore bourse.
As at 9.04am, Keppel was down 4.6 per cent or S$0.25 to S$5.15, with some 963,000 shares traded. By 11.59am, the counter recovered slightly to trade at S$5.19, down S$0.21 or 3.9 per cent with almost 4.7 million shares changing hands.
Over the weekend, Morgan Stanley Asia (Singapore) had said on behalf of Temasek's wholly-owned subsidiary Kyanite Investment that the latter will decide by end-August 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 S$697.6 million for the second quarter ended June 30, dragged by a massive S$919 million impairment, breaching certain conditions for the offer.
Under the MAC, Keppel's profit after tax must not fall by more than 20 per cent or about S$557 million over the cumulative four quarters from Q3 2019.
Given the MAC non-fulfillment, Temasek now has three options: waive the breach and continue with the offer at the S$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 S$4 billion pre-conditional partial offer would raise the state investment firm's stake in the conglomerate to 51 per cent.
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 S$6.46, from S$7.48 previously, while keeping its "add" rating. Analyst Lim Siew Khee wrote on 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 (P/BV) in early 2016 during last oil crisis, or S$4.88, Ms Lim added.
Meanwhile, DBS Group Research analyst Ho Pei Hwa on Monday pointed out that there is now uncertainty regarding Temasek's partial offer.
The validity of the offer price of S$7.35 per share (including the S$0.15 dividend declared after the proposal date) remains unclear, as Temasek will decide whether to waive the MAC non-fulfillment by Aug 31, Ms Ho wrote.
Assuming a successful tender of about 39 per cent of Keppel shares, the partial divestment gains could lower the cost per share by about S$0.70 at the current share price, she said.
With Keppel's latest results, the 12-month trailing profit after tax now stands at a loss of S$165 million and will require S$887 million in profit after tax in Q3 2020 in order to meet the MAC clause. "This seems rather unrealistic, given the average quarterly profit of S$200 million over the past four years," Ms Ho added.
DBS, which has a "buy" call on the stock, revised its 12-month price target to S$6.40, down from S$6.80 previously. The lower target price also takes into account the "whopping" second-quarter impairment of S$919 million largely for the offshore and marine (O&M) segment, according to the research team.
"The stock has been beaten down since the emergence of impairment news, trading 7.5 per cent below the pre-offer share price (S$5.84), which we believe has discounted the partial offer premium and factored in a challenging outlook. Valuation is undemanding at 0.9 times P/BV, which is about one standard deviation below the mean," Ms Ho said.
In another research note on Monday, UOB Kay Hian said it remained "reasonably confident" that Temasek will continue with the offer, albeit likely at a lower offer price.
This is considering that Keppel's price to net asset value (P/NAV) ratio was 1.3 times at the end of June 2020, which is higher than the 1.2 times at the end of September 2019 when the initial partial offer was announced, wrote UOB Kay Hian analyst Adrian Loh.
He noted that the extraordinary general meetings for Sembcorp Industries and Sembcorp Marine's proposed rights issue and demerger will take place on Aug 11. Should these two companies' 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 added.
"At the end of the day, the game plan to create a single Singapore-based O&M 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 S$7.10, from S$7.15 previously, while maintaining its "buy" rating.
Echoing similar views, Joel Ng, research head at investment service firm KGI Securities, told The Business Times on Monday: "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.
"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," Mr Ng said.