SINGAPORE (Apr 24): Since the start of 2020, several stocks have seen their market capitalisation plunge due to the negative effects of the Covid-19 outbreak. This is most apparent in companies that depend on the tourism industry.
Singapore Airlines (SIA) has seen its share price drop 33.5% year-to-date while its market capitalisation fell 33.5% to $7.1 billion from the beginning of this year. The stock is also trading at a 21-year low, plunging to $5.36 on March 23.
The airline also undertook a renounceable rights issue of new shares and mandatory convertible bonds (MCB) to raise it up to $15 billion on March 26. The airline has already slashed its scheduled capacity by some 96%, grounding all but nine of the 147 SIA and SilkAir aircrafts while only two Scoot flights remain operational.
In Credit Suisse’s view, SIA’s capital raise could be a precursor to more such action among Singapore-listed companies. “We also see acceleration in consolidation amongst offshore and marine companies in a prolonged period of weak oil prices,” said Credit Suisse’s head of Singapore equity research Gerald Wong in his April 14 report.
He also expects a prolonged downturn in the offshore and marine (O&M) sector to hasten consolidation in the industry. “We see the greatest synergy from consolidation between the Singapore yards as the potential reduction in capacity, as operations are consolidated around the under-utilised Tuas Boulevard Yard,” Wong adds.
On April 20, oil prices sunk to negative levels for the first time in history, further dampening sentiment in this sector. Wong estimates Keppel Corporation’s orders for 2020–2022 to fall to $1.5 billion to $2.5 billion from $2.5 billion to $3.5 billion previously. The O&M industry will barely break even from 2020 to 2022.
Apart from rescuing SIA, state investment agency Temasek Holdings is also likely to nudge its other portfolio companies into making deals of their own. In October 2019, Temasek announced plans to make a partial offer to acquire 30.55% of shares in Keppel at $7.35 per share in cash, subject to certain pre-conditions. Temasek already directly owns 20.45% of Keppel but will own a 51% stake if the offer is successful.
Temasek’s stated intention is to undertake a strategic review of Keppel’s business, reigniting talks that some form of rationalisation between Sembcorp Industries — in which Temasek holds 49% — and Sembcorp Marine, SCI’s separately listed offshore and marine subsidiary.
Still, this could also be the time for big conglomerates with hefty cash flow to acquire companies at cheap. But this applies mainly to companies whose business are not significantly adversely affected by Covid-19.
Tan Sze Shing, a principal in the M&A practice at law firm Baker McKenzie Wong & Leow, agrees that the market volatility is a catalyst for more deals to be inked. “We expect a slowdown in traditional M&A as businesses focus on their existing businesses,” Tan tells The Edge Singapore.
“However, the effects of Covid-19 will create distress for a lot of companies and if this period drags on, we expect distressed sales and consolidations to increase. We also expect to see an increased interest in take-private and equity investment transactions in the capital markets as valuations are now relatively more attractive,” she adds.
Share the pain
Meanwhile, Credit Suisse’s Wong says the impact from the pandemic will be worse than the Global Financial Crisis, with Singapore’s GDP estimated to decline by 3.0% this year. “While the decline in tourism, aviation, hospitality and retail sectors have been evident, manufacturing could be the next shoe to drop as key export markets remain in various stages of lockdown,” he adds.
The Singapore government has committed almost $60 billion — or 12% of GDP — to cushion the impact but this might still be insufficient to cover the loss in cash flow from the circuit breaker period and loss in tourism receipts. Overall, Wong estimates that Singapore’s measures will provide a cushion of three to four months, while a sharp decline in manufacturing output would necessitate further support measures.
Corporate earnings are also under significant pressure. Return of investments from ex-banks were at a 20-year low of 6.8% in 2019, while 35% of SGX-listed companies were loss-making, adds Wong.
Furthermore, large listed companies are also under pressure to “share the pain” with small and medium enterprises (SMEs) and householders, which will put further pressure on profitability, notes Wong. This is most evident in the Covid-19 (Temporary Measures) Bill passed which will allow tenants in commercial and industrial assets to hold off contractual obligations for at least six months.
There will also be downside risks to earnings and dividends. Wong estimates earnings for 2020 to drop by 21%. If this economic weakness prolongs, that dip could up to 39%.
Deals galore?
“Clearly at this time, companies around the world are focused on reviewing their systems, financing and putting in place measures to support their existing businesses, customers and employees. For the many companies whose cash flows and businesses are adversely affected by the global effects of Covid-19 (irrespective of their size), now may not be the right time to extend an already stressed business to enter into M&A transactions,” Tan notes.
“However, for companies whose cash flows and businesses remain sound and (largely) unaffected by the global effects of Covid-19, this could be an opportunity to pick up good quality assets,” she adds.
Deal-making in times of market crisis is not new: Similar deals were done during the global financial crisis in 2008 to 2009 when Qatar and Abu Dhabi invested billions of dollars in Barclays, Credit Suisse, Porsche and Daimler AG.
Refinitiv, the financial and risk solutions arm of Thomson Reuters, estimates that the number of announced M&A deals over US$1 billion ($1.42 billion) registered a shut-down on the week of April 12, the first since September 2004. That same week also marks the fourth consecutive week without a deal over US$1 billion in Europe.
Meanwhile, worldwide merger activity totals US$762.6 billion for year to date, a 33% decline compared to a year ago and the lowest year-to-date period for deal making since 2013. The number of announced M&A deals has also declined 20% compared to a year ago — a seven-year low.
Amid uncertain times, some companies may however adopt a ‘wait and see’ approach to acquisition. Some Chinese companies, confident that the worst of the Covid-19 in the mainland is over, are reportedly gearing up to shop for discounted deals in Europe. This is especially as the pandemic has made several companies desperate for cash to stay afloat.
According to Bloomberg, bankers in Europe are experiencing a surge in requests from Chinese firms and funds for proposals. Many of the potential acquirers are state-owned enterprises. Talks of these potential acquisitions come as listed company valuations sink with the MSCI Europe Index which fell by about 20% this year in the worst rout since the global financial crisis.
When contacted, Andrew Martin — managing principal at Baker McKenzie Wong & Leow — tells The Edge Singapore, “I note that India has just announced restrictions on investments from countries with which it shares a land border. The move seems designed to deter acquisitions of Indian companies by neighbours including China. I think we will also see governments struggling to balance economic nationalism with a desire to preserve jobs. It is likely that decisions will be taken on a case by case basis as governments try to retain discretion whilst not blocking investment altogether. However, such flexibility creates uncertainty for investors.”
In Singapore, property giant City Developments (CDL) on April 15 announced plans to acquire a 51.01% stake in China’s Sincere Property Group for RMB4.39 billion ($880 million). CDL might eventually increase its stake by another 9% by paying another RMB770 million. Assuming the call option is exercised, the total consideration to acquire a 60.01% effective stake in Sincere Property is RMB 5.16 billion.
This acquisition was supposed to be completed in 4QFY2019 but fell through, the result of “a variety of factors” said CDL. It seems that the Covid-19 outbreak has helped push the CDL–Sincere Property deal to completion: Instead of the previously agreed 24% stake in Sincere Property for RMB 5.5 billion, the revised deal works out to almost 50% below Sincere Property’s net asset value.
The deal has also lifted CDL’s presence in China significantly. “While there are challenges and uncertainties caused by the Covid-19 pandemic, China remains one of our key overseas markets and we hold a positive view of the long-term growth and market outlook there,” says CDL CEO Sherman Kwek.
