Keppel Land Limited - MANAGEMENT REPLY: Is Keppel Corp's voluntary cash offer really good enough?

30/1/2015 – Keppel Land Ltd has received an offer from its parent company, Keppel Corporation Ltd to buy out the public shareholders in a voluntary cash offer of S$4.38 per share (the so-called base case).

At S$4.38 per share, the offer values Keppel Land at about S$6.8 bln.

In order to encourage shareholders to accept the offer, Keppel Corp, which owns a 54.59% stake in Keppel Land, said it would raise the offer price to S$4.60 per share (the so-called best case) if it manages to acquire more than 90% of Keppel Land's outstanding share capital.

At S$4.60 per share, Keppel Land would be valued at about S$7.1 bln.

If Keppel Corp manages to acquire a more than 90% stake in Keppel Land, it can exercise the right to delist the company as per Section 215(1) of the Companies Act.

Investors clearly think the offer will succeed, because soon after it resumed trading on January 26, after a trading halt which came into effect on January 21, Keppel Land's stock soared about 25% to S$4.55 – a level last seen in late 2007.

Apart from the offer announcement, Keppel Land released the following earnings for Q4 2014:

Revenue: +39.5% to S$705.4 mln
Profit: -21.6% to S$444.5 mln
Fair value gain on investment properties: S$220.2 mln vs S$331.1 mln
Cash flow from operations: S$236.5 mln vs S$27.5 mln
Dividend: 14 cents per share vs 13 cents per share
Order book: Not disclosed

Analysts Eli Lee and Andy Wong Teck Ching at OCBC Investment Research find the earnings to be in-line with their expectations.

Keppel Land's FY2014 earnings came in 4% higher than the broker's full-year estimates.

OCBC Investment Research has recommended shareholders accept Keppel Corp’s cash offer.

The analysts point out that both offer prices (S$4.38 in the base case or S$4.60 in the best case) include the recently announced final dividend of 14 cents per share.

In other words, Keppel Corp will have to shell out of its pocket S$4.24 in the base case or S$4.46 in the best case scenario.

The broker also points out that Keppel Corp has already indicated that both the offer prices are 'final', meaning Keppel Corp is unlikely to improve/negotiate it any further.

It adds, the base/best offer price works out to be about 0.88x/0.93x of Keppel Land's net asset value.

According to the revalued net asset value (RNAV) of Keppel Land, as estimated by OCBC Investment Research, the base/best offer price works out to be about 0.73x/0.76x of its RNAV.

Given the uncertainty over the outlook for Keppel Land's core development businesses in Singapore and China, the broker believes this is a fair offer which allows the minority shareholders to exit at a price above the last 36-month high.

As Keppel Land was OCBC Investment Research's top-pick in the sector, it advises the investors to switch to CapitaLand with a fair value estimate of S$3.79.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Why should Keppel Land's shareholders accept an offer below its net asset value?

In its offer announcement (page 8), Keppel Corp said the offer is a "sound and well-timed investment".

It said Keppel Land has presence in markets which have a positive medium to long-term outlook.

In its core markets of Singapore and China and growth markets of Vietnam and Indonesia, it says Keppel Land is expected to benefit from rising urbanisation, an improvement in infrastructure and an increase in the number of consumers.

The offer is earnings-accretive for the shareholders of Keppel Corp from the very first day.

Assuming it succeeds in privatising Keppel Land, Keppel Corp's FY2014 earnings per share would increase by 13% and its return on equity will improve to 21% from 18.8% presently.

According to Keppel Land's recently released Q4 earnings report, its net asset value was S$4.95 per share.

Therefore, Keppel Corp's base offer price of S$4.38 and the best case offer price of S$4.60 works out to be about 0.88x and 0.93x respectively of Keppel Land's NAV.

As mentioned, the base/best offer price works out to be about 0.73x/0.76x of Keppel Land's RNAV as estimated by OCBC Investment Research.

In other words, Keppel Corp is offering 73/76 cents per share for assets estimated to be worth a dollar.

While Keppel Land is yet to appoint an Independent Financial Adviser who would weigh the merits of the offer and make a recommendation to its shareholders, Keppel Corp has already said the offer is 'final'.

Therefore, any reasonable investor would wonder if Keppel Corp is really offering a good deal to Keppel Land's minority shareholders.

Should Keppel Land's shareholders accept the offer for less than the NAV, even as Keppel Corp expects the business to grow in the medium to long-term?

Question

2. Why was its stock rising immediately before the announcement?

Keppel Land's stock price gained about 23 Singapore cents or about 7% in four trading sessions before the halt on January 21, with a nearly four-fold rise in average daily volume (source:NextVIEW).

Any reasonable investor would wonder if the gains were led by someone acting on unpublished price sensitive information regarding the cash offer from Keppel Corp.

(Read the full story to get all 6 questions)

Serena Toh at Keppel Land replied: "We are unable to comment on the Offer at this stage. The full terms of the Offer will be contained in the Offer Document which will be provided by the Offeror within 14 to 21 days of the offer announcement date of 23 January 2015. Thereafter, the Company will within 14 days of the posting of the Offer Document issue a circular to shareholders which will contain the independent financial adviser's evaluation of the Offer and the recommendation of the directors who are independent for the purpose of the Offer. Please refer to the Offer Document and the circular when they have been released."

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