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A tale of two Keppels: Win, lose or draw?

Saturday, January 24, 2015

Keppel Corporation is going to try to take Keppel Land private. This news came shortly after Keppel Corporation declared a generous dividend per share of 36c.

If I were a shareholder of Keppel Corporation's, I would have been elated and, then, worried by the recent string of events.

The following is taken from the comments section of my blog:

When I was asked in the last few months why did I choose to invest in SembCorp Industries instead of Keppel Corporation since both of them are blue chips in the O&M category, I said that I felt better about the former's utilities business in the current environment than the latter's real estate business. Although this latest development involves Keppel Corporation's real estate arm, quite honestly, I could never have seen this form of corporate action coming. I am just a frog in a well, after all.

Paying $4.60 a share (eventually), Keppel Corporation is not getting Keppel Land at a discount to NAV since Keppel Land's NAV/share is about there. In fact, it is going to be at a slight premium. So, there is nothing for Keppel Corporation's shareholders to rejoice about. At least, if the purchase was going to be at a discount, it might make Keppel Corporation's resulting weaker balance sheet easier to swallow.

For Keppel Corporation's action to make sense, it has to be because the management feel that Keppel Land will add value either in terms of income generation or capital appreciation in the years to come. However, near term prospects are challenging as Keppel Land is still mostly dependent on income from real estate development (property trading) although they have increased the size of their recurring income stream in recent times.

Could we see Keppel Corporation's stock price weakening next week? With a 36c dividend dangling, Mr. Market might close an eye to the eventual weaker balance sheet, for now.

Related post:
SembCorp Industries and SembCorp Marine.


AK71 said...

From my FB wall:

Ronnie Chan:
Dear Assi AK, just want to check with you, how did u get that the higher offer price is higher than its NAV? Based on the offer announcement, the base and higher offers are stated to be 0.88x and 0.93x of NAV respectively.

Assi AK:
Oops. Really? I got the information from Keppel Land's presentation slides from November 2014.

Ronnie Chan:
Their full-year announcement puts KepLand NAV at $4.95. =X

Assi AK:
Wow! Such a big difference in 3 months... -.-"

Ronnie Chan:
They sold a lot of things, think mainly gain on disposal of associate, subsidiaries and investment properties to Keppel DC REIT.

AK71 said...

Also from my FB wall:

Ck Loh:
it's the best time to privatize now when the property sector seems lacklustre - be greedy when ohen others are fearful.

Assi AK:
However, we want to buy at a big discount to valuation if possible. Buying at $4.60 a share hardly creates value for KepCorp's shareholders. Of course, it is good news for KepLand's shareholders.

Ck Loh:
maybe they know things that we don't and i am sure that this is not a typical REITs style of buying assets that are overpriced just to let the asset owners have an exit... haha. as buffett says, "I'd rather buy a good company at a fair price than buy a fair company at a good price."
anyway, as long as kepcorp is trading at below $.8.50 now, i'm ALL-IN. lol

Assi AK:
Have holding power is OK de.

Ck Loh:
even if at $9 also i will hold long long.... lol. i think they made a very wise move cos you can never time the bottom, just like i can never know what is the lowest price that the shares will fall to, but roughly in the range is good enough liao lah. buy to own FOREVER and collect passive dividends. now, we can say to be shareholders of a property company liao! LOL

Assi AK:
Is there a margin of safety in KepCorp's purchase of KepLand at $4.60 a share? Personally, I don't see it but it is probably because I am not visionary.

Ck Loh:
the "problem" with property companies is that they have huge land banks or long term tenancies which may not have been revised to current market values, etc. so let's see how this goes. they paid 39cts in total dividends last year, so even at $9.75 per share, it's still a good 4% yield. higher than inflation and CPF and at $8.66 it's 4.5% . hehe

Assi AK:
Yes, RNAV is always something debatable. During the GFC, the NAV of KepLand was hit very badly. It took them 3 years to recover the lost value. I think it is useful to remember this and ask if there is any margin of safety buying at $4.60 a share.
Why I bought into OUE and Wing Tai in the last few months was because of the big discount to valuation that Mr. Market offered. I would not have bought if the discount was a mere 10% to NAV.

Ana said...

actually, there is another aspect i am not pleased a shareholder of KepLand.

A couple of weeks prior to the announcement, the trading volume of KepLand increased from 1.5m to 4million....and 1-2 days before the results announcement, 10 million. Obviously, there was a leakage, and someone is buying up KepLand shares in huge quantities to benefit from it.

If you recall, the same happened to Olam, where the trading volume increased a few weeks before Temasek's announcement.

Market chatter is that it was the same person who bought up both Olam and KepLand shares, both prior to the announcement (which was share-price positive news). I am rather disappointed SGX did not launch an investigation.

SMK said...

Maybe they just want the cashflow to look ok for the next few years. Dividend is a strong factor for a lot of kep corp holders.

Property received a boost in terms of forseeable low interest rate in the next 1 to 2 years.

singapore govt policies on credit doesn't make that big of a difference to corporate property entities since they are free to move their assets.

I see the recent divestments by keppel land as positives. I can't say much for those who bought from keppel land the cbd assets.

I believe fed will still raise their rates and there will be some immediate reaction. But the longer term 2 to 3 years should still see a resumption of asset value growth.

With that in my mind, I believe we got a few years to accumulate banks, property counters but lesser time to accumulate energy sectors (and I don't mean rig builders).

AK71 said...

Hi Ana,

Oh, I am very sure that some insiders and their relations will have their pockets fattened by this exercise.

I kept asking why $4.60? Why not a lower price? Say, $4.00? A lower price that is attractive enough to KepLand's shareholders and yet create more value for KepCorp's shareholders would make more sense.

Circumstantial evidence. I must not say too much. -.-"

AK71 said...


Yes, I get the distinct feeling that KepCorp is trying to address the weakness in their O&M business by privatising KepLand too but at what price? That is a pertinent question.

Interest rates will rise. There is no other logical direction for it to go. It is just a matter of time.

So, buying into banks makes sense to me. Buying into property counters at a big discount to valuation makes sense to me too as money printing has caused and will continue to cause asset prices to inflate.

What are you referring to when you say energy sectors?

yeh said...

So ak

What price you will consider to go in?
For keppel corp

AK71 said...

Hi yeh,

I haven't really done a valuation of KepCorp since I am more interested in SembCorp. However, based on TA alone, immediate support is at $7.90. If that should break, we could see $7.10 (which I am sure would make many people happy). :)

Investor Boy said...

Hi AK,

Enjoyed your article - I am also an owner of Kep Corp shares, and this move has also puzzled me.

Probably a silly question, but when you talk about valuations/NAV, how do you do your own calculations to get to that figure? In my limited knowledge I can only think of (Assets - Liabilities)/Shares outstanding


AK71 said...

Hi Investor Boy,

We can either do our own calculations or just take the numbers from the latest quarterly reports.

These days, most companies have very nice presentation slides which show all the important numbers very neatly. :)

AK71 said...

Nomura maintained its "reduce" rating for Keppel Corporation, calling the news "negative catalyst to the stock" and reiterating its target price of S$7.95.

The rating, said Nomura analysts Wee Lee Chong and Abhishek Nigam, is due to the weak new orders outlook owing to a global oversupply of jackup rigs in 2015, and the potential consensus downgrades for Keppel Corporation's O&M earnings in FY2015/2016.

"We are reviewing our (O&M) earnings forecasts and target price for Keppel Corporation, with downside risk potential. This is due to the lower than expected net tangible assets and order book for Keppel Corporation's O&M division as of end-2014, and the potential increase in conglomerate valuation discount given the re-deployment of funds to acquire additional shares in KepLand vs the typical higher valuations given to the O&M business," the analysts said in a report.

Over at OCBC Investment Research, its "buy" call on Keppel Corporation was maintained, but it lowered its fair value from S$9.89 to S$9.14.

"We believe that this privatisation attempt has taken the market by surprise. Given the rich price offered for KepLand and the synergies for the combination may not be immediately apparent, there may be some near-term weakness in Keppel Corporation's share price. We incorporate a higher conglomerate discount of 10 per cent (up from five per cent) for the privatisation of KepLand, and after updating the market values of Keppel Corporation's listed entities, our fair value estimate drops from S$9.89 to S$9.14," the report said.

"However, given the upside potential of 19 per cent (includes 5.8 per cent dividend yield), we maintain our 'Buy' rating on the stock; longer-term investors may wish to accumulate on dips."


bluelite said...

erm, are these the real reason y Kep Land privatise?

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