Recently, there has been a flurry of activity in the Singapore stock market.
In early March, Jardine Matheson Holdings Ltd (SGX: J36) announced that it would acquire the remaining 15% of Jardine Strategic Holdings Ltd (SGX: J37) it did not already own at a proposed acquisition value of US$5.5 billion.
And just a few weeks later, local property giant CapitaLand Limited (SGX: C31) announced that it was proposing to restructure itself by privatising its development arm while keeping its investment management arm public.
Although both deals were offered at a premium to their respective “last trading prices”, shareholders of the acquired companies will still receive less than the net asset value of their respective companies.
Jardine Strategic is being acquired at a 19% discount to the value of its listed assets while shareholders of CapitaLand are receiving 0.08 units of CapitaLand Integrated Commercial Trust (SGX: C38U) and S$0.951 in cash for the development arm of CapitaLand, which translates to a 5% discount to its actual net asset value.
Fertile hunting ground?
These bring us to the question- is there likely going to be more privatisation offers in Singapore?
The two companies being acquired/restructured are just two of numerous companies in Singapore that are trading at discounts to their book value.
With Singapore stocks trading at depressed valuations, even if acquirers offer a premium to a stock’s last trading prices, they may still be able to obtain their target assets at a hefty discount to book value.
This could make the Singapore stock market the perfect hunting ground for acquirers who are looking to buy companies at a cheap price.
This is exacerbated by the Singapore stock market’s failure to recover to pre-COVID levels. The Business Times reported that there was a 70% increase in deal value in 2020 compared to 2019.
With no catalyst in sight to lead Singapore stocks to more reasonable valuations, it is very likely that these low valuations will persist, leaving room for acquirers to swoop in.
This could open the door to a potential strategy for investors who want to take advantage of the flurry of privatisation deals. Companies that are most likely to be privatised usually trade at a relatively cheap valuation to earnings or assets and have a large shareholder who can easily consolidate their position.
But that does not mean that investing in potential privatisation targets is a fool-proof strategy.
Predicting which companies could be acquired is a shot in the dark. What may seem like a potential privatisation deal may never materialise, leaving investors holding on to a chronically undervalued stock with no catalyst for rerating the stock.
Although holding on to dividend-paying stocks will provide income while you wait, the limited capital gain could end up hindering investment returns- an expensive price to pay when stock markets in other parts of the world are rising considerably.
Many investors may consider Singapore a boring stock market with few companies offering attractive business growth, but the low valuations of some companies may throw up unique opportunities for acquirers and investors alike.
Nevertheless, investors who are looking to speculate on privatisation targets should proceed with caution. If a deal does not materialise as you had hoped for, the stock may trade sideways for years, becoming an expensive opportunity cost in a rising market.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
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Disclaimer: Jeremy Chia does not own shares in any of the companies mentioned.