The sad truth is that retail investors who have a day job and household responsibilities can hardly make head nor tail of investment news.
However, the Internet is full of hardworking bloggers and experts who are more than willing to put in some of their “cognitive surpluses” to allow a savvier retail investor the opportunity to act on their investment insights.
The first important piece of information is that Temasek has made a partial offer for Keppel Corporation (SGX:BN4) shares.
A partial offer is a rare event and has to distinguish from a full acquisition. Basically, Temasek will be happy to pay $7.35 for up to 30.55% of the shares held by existing retail investors.
This deal, expected to take place within one year, needs to be approved by current shareholders and 30.55% shares must be pledged by existing shareholders in order for the partial offer to succeed.
When I caught wind of the news, Keppel Corp was offering at $6.77, hardly close to the $7.35 tendered by the acquirer.
The first step would be to calculate what is the value of 69.45% of the shares that Temasek does not want.
So, we begin with a simple equation to find out how much we are actually paying for remaining shares 69.45% of shares.
(Value) x 0.6945 + ($7.35) x (0.3055) = 6.77
Solving the equation, the value of the remaining shares to be $6.51 – so if after the partial offer, Keppel shares trade below $6.51, we may be sitting at a loss.
We need more information to decide whether this is a safe trade – What margin of safety do we have when we buy Keppel Corp at $6.51 ?
The first place to find more information is on SGINVESTOR.IO to look at how much analysts value the stock prior to this partial offer announcement. DBSVickers valued the stock at $7.50 on 18 October 2019. OCBC valued it at $7.58 on that same day. This gives credence to Temasek’s offer – they really believe that this stock is under-priced.
The second place to find more information is on Dr Wealth blog itself, where an excellent article written by thebearprowl can be found here. His analysis, which is excellent, valued the stock over the long term at $15 each.
With all three pieces of information, we can say that there is a high probability that the deal may get through at $7.35. If the deal fails, it because retail shareholders believe that the share is worth even more than $7.35 and the price would go up even higher.
We are now able to speculate on what will happen to Keppel Corp and define how we will play this piece of news:
There is a distinct possibility that the price will trend close to $7.35 over the next year. Let’s just say $7.30 in a year and earn a 4% dividend in the process. This calculated upside is valued at $0.85 or 12.5%.
The opportunities for leveraging this investment is high. Using an equity multiplier of 2, buying the stock with leverage and financing fee of 3.5% can possibly yield a nice return of 12.5% x 2 – 3.5% or 21.5% over a year. This is not bad for a play if executed by a retail investor.
As the stock is subject to partial offer by Temasek, it will not likely have the same volatility as the rest of the STI as it moves over a glide-path to $7.35 over a year, so putting some collateral consisting of Keppel Corp shares may even dampen the volatility of a leveraged portfolio consisting of dividend-yielding REITs, making returns more stable for at least the next year.
Unfortunately, as attractive as this bet is, some residual risks remain:
- Because this is a partial offer, 69.45% of stocks can drop if Keppel does badly in the interim.
- The partial offer may fail.
That is the nature of retail investing, looking for key pieces of information and doing one’s level best to manage the risks. When things go wrong, at least you have done your best in the interim.
I took a significant position in Keppel at $6.77 and, after conducting a quick election in the Early Retirement Masterclass FB group, students voted to rotate a badly performing SPH position in Batch 5’s student portfolio to double up on Keppel Corp.
If you are interested in learning more about the class, you can check it out here.
how to use equity multiplier. what instrument to buy?
equity multipler refers to leverage, where you borrow from the broker an amount of money. an equity multiplier of 2 refers to the fact that you’re borrowing $1 for every $1 that you have. the instrument we are speaking of in this case is a stock.
DBS valuation is in part based on the O&M business returning 15%ROE. I think not only is this not possible but Keppel needs a substantial impairment on its O& M infrastructure cost. DBS has been making optimistic noises about this segment for the last 18 months or so but their forecast has not materialised. This is very likely the main factor behind TH saying a ‘comprehensive strategic review’ will be undertaken
Hi,
Any updates? Am trying to decide if I should let go of my stocks which I had bought a Long time ago. So will suffer a huge loss even after taking in the dividends that I’ve collected over the years. Was advised that if the deal doesn’t go through in Oct, share price will plunge. Not savvy with stocks, fingers burnt! Lesson learnt ????