Keppel Corporation Limited (SGX: BN4) became the talk of the town in Singapore’s financial markets last month when it announced an offer to take Keppel Land Limited (SGX: K17) private. It is estimated that a full acquisition of Keppel Land would cost Keppel Corp up to S$3.2 billion. That’s no chump change, even for a conglomerate like Keppel Corp that has a market capitalisation of some S$13.4 billion. Is it really a wise use of funds on the part of Keppel Corp? What else could Keppel Corp do with S$3.2 billion? Some share buy-backs? There’re actually many things Keppel Corp can do with S$3.2…
It is estimated that a full acquisition of Keppel Land would cost Keppel Corp up to S$3.2 billion. That’s no chump change, even for a conglomerate like Keppel Corp that has a market capitalisation of some S$13.4 billion.
Is it really a wise use of funds on the part of Keppel Corp? What else could Keppel Corp do with S$3.2 billion?
Some share buy-backs?
There’re actually many things Keppel Corp can do with S$3.2 billion, with a share buyback being one possible avenue.
It’s my opinion that any company should seriously consider a large share buy-back programme if management thinks that its shares are undervalued.
Keppel Corp is currently trading at around 8.4 times its trailing earnings and has a price to book ratio of around 1.5.
Source: S&P Capital IQ
As you can see in the table above, these are very low valuations in relation to where the company has been trading at in the last six-plus years. If Keppel Corp thinks that much brighter days are ahead for its business, buying back shares at such a low valuation can be a great value-accretive act for existing shareholders in the company.
How about a special dividend?
The company could even consider a special dividend for shareholders and allow shareholders to make their own decisions about where and how to invest.
After all, it might be better for Keppel Corp to focus on running the business while returning capital to shareholders to allow them to focus on how to invest the money.
Or perhaps debts could be paid down?
Interestingly, Keppel Corp does not exactly have a rock-solid balance sheet. As of 31 December 2014, the company had S$6.1 billion in cash and equivalents while having S$7.38 billion in total borrowings. This leaves the firm with a net-debt position of S$1.28 billion. What’s more, Keppel Corp’s total debt to equity ratio is at 50.1% – that’s not exactly low either.
Given these, the capital earmarked by Keppel Corp for Keppel Land could perhaps be funneled toward the repayment of some borrowings.
These are just some other options Keppel Corp has for the use of capital besides trying to take Keppel Land private.
Investors in Keppel Corp need to think if privatising Keppel Land is actually the best option here for Keppel Corp and whether the acquisition would actually give investors the best return on the potential-S$3.2-billion-to-be-spent over the long run.
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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 Stanley Lim owns Keppel Corporation Ltd.