What the Trading Halts For both Keppel Land Ltd and Keppel Corporation Limited Might Mean for Their Investors

Real estate outfit Keppel Land Ltd (SGX: K17) and its parent – the oil & gas, infrastructure, and property conglomerate Keppel Corporation Limited (SGX: BN4) – have both called for a trading halt on their shares this morning. As of the time of writing (3:26 pm), the halts are still in place.

According to a Straits Times’ report published earlier today, both firms have also decided to postpone their briefings for their upcoming fourth-quarter earnings release. Keppel Land and Keppel Corp had initially planned to announce their fourth-quarter results on the evenings of Wednesday and Thursday, respectively.

A possible privatisation

The same Straits Times article I referenced just above also added the following bit of information which may be important for their respective investors to note:

“Speculation in the market is that Keppel Corp could privatise Keppel Land; analysts have also said that Keppel Land may pay out a special dividend.”

If Keppel Corp were to privatize Keppel Land, there are a few things for investors of both companies to note. Let’s start with Keppel Corp first.

Stretched finances

As of 5 March 2014, Keppel Corp holds a 54.5% stake in Keppel Land, which commands a market capitalisation of around S$5.64 billion at its current share price of S$3.65.

Most privatizations of publicly-listed companies are done at prices above their current share prices, but let’s put that issue aside for now and look at what a potential privatization of Keppel Land at S$3.65 per share may do to Keppel Corp’s financial stability.

Keppel Corp’s last reported financials (for the quarter ended 30 September 2014) had it carrying S$4.91 billion in cash and short-term investments and S$7.24 billion in borrowings. That balance sheet could possibly finance Keppel Corp’s possible purchase of the other 45.5% of Keppel Land given that it would cost “only” around S$2.57 billion.

But doing so would weaken Keppel Corp’s balance sheet pretty drastically. Given declining oil prices, and with the offshore & marine segment being Keppel Corp’s most important profit contributor over the past few years, increasing its leverage now would seem like a risky move for the company to make.

An alternative route

There’s always the option for Keppel Corp to issue more shares as currency to purchase Keppel Land. But doing so might not seem wise as well.

Acquisitions made by the issuance of shares have a generally better chance of creating value for shareholders of the acquirer only if the shares used are considered over-valued; in this sense, the acquirer’s actually using 50 cents (with a face value of S$1) to buy a dollar’s worth of goods.

But it can be argued that Keppel Corp’s shares are anything but over-valued at the moment. At the conglomerate’s current share price of S$8.10, it’s trading for merely 8 times its trailing earnings. That is significantly lower than its long-term average PE (price to earnings) ratio of 13.1 over the past decade.

So, using shares as currency may not present the best deal for Keppel Corp’s existing shareholders given the current circumstances.

Never sell for cheap

To compound the problem for Keppel Corp, there is every likelihood that investors in Keppel Land would demand a much higher price than S$3.65. That’s because Keppel Land is currently trading at a 20% discount to its last reported book value per share of S$4.59.

For a real estate outfit that has seen its book value per share today more than double what it was back in 2003 (see the table below), Keppel Land’s current discount to book value seems all the more inappropriate.

Year Keppel Land’s book value per share
2003 S$2.10
2004 S$2.26
2005 S$2.35
2006 S$2.21
2007 S$3.18
2008 S$3.39
2009 S$2.36
2010 S$2.85
2011 S$3.74
2012 S$3.99
2013 S$4.52
Q3 2014 S$4.59

Source: S&P Capital IQ

This brings me to what Keppel Land’s investors need to note: They need to decide, for themselves, what a fair price is for the company.

As mentioned earlier, Keppel Land’s current discount to its book value does not seem warranted, given that the firm has managed to steadily grow its book value per share over the years. But that’s also predicated upon the assumption that the firm’s historical growth can continue on into the future.

Such assumptions would naturally differ among each investor – so, it’s important that current shareholders of Keppel Land start thinking about what’s a fair price for the company if it were to be privatized. Only then can they know if what Keppel Corp might potentially be offering is fair.

A Fool’s take

There’s nothing concrete at the moment behind the reasons for both companies’ current trading halts as both of them have yet to make any new formal announcements.

But if the rumours of a privatization – as reported by the Straits Times – is true, then investors in Keppel Corp need to keep a close watch on the firm’s balance sheet and how it intends to finance the deal.

As for Keppel Land’s investors, they’d need to take into account the company’s historical growth trends as well as future opportunities and determine a fair price for the firm.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.