More non-core assets could be on the chopping block

MORE boardroom huddles over whether to sell off assets considered less crucial to growth could be on the calendar as companies seek to improve valuations and bolster their balance sheets amid the economic gloom that has cast a pall over markets.

Divestments of these so-called "non-core" assets could be more likely now for sectors such as oil & gas, where prospects are dim, and industries where the rules of the game are changing - such as telecommunications, transport and banking, market watchers say.

Selling such assets, which may be less well integrated into the group or loss-making, could help companies reduce any drag on valuations and give them more funds to invest in other opportunities that may bring in juicier returns, they note.

Companies that have come up in market chatter as examples of possible sellers of non-core assets include conglomerate Keppel Corp, which is facing a prolonged downturn in the offshore industry; Singtel; OCBC Bank; and Singapore Press Holdings (SPH), which publishes The Business Times.

Observers are quick to add that most Singapore corporates are not highly geared, and their balance sheets are strong enough for them to be in no hurry to divest.

Still, the recent market downturn has reignited talk of who might sell what, and why.

One thing to keep in mind is that non-core is, as Lee Suet Fern, managing partner of Morgan Lewis Stamford, put it, "sometimes a convenient label that corporates use when they need to or want to dispose of assets to raise funds, take profit and/or divert into alternative investments".

"Non-core asset divestment is sometimes on the drawing board when conglomerates trade at discount or when market conditions are challenging," she added.

Ng Eng Leng, partner at Rodyk & Davidson, said that companies may consider non-core divestments to improve valuations by reducing any "conglomerate discount" applied to their stock.

"Doing so in the current climate (where share prices have been pummelled badly) can hopefully refocus investor attention on the core business of the listed holding company . . . if a non-core asset is loss-making or non-performing, it can be a drag on management time and financial resources of the holding company."

Kum Soek Ching, head of South- east Asia research at Credit Suisse Private Banking Asia Pacific, said that divestment proceeds could "go towards supporting dividend payment at a time when revenues and core profits are under pressure". "Capital recycling by selling a lower-return asset and reinvesting in a higher-return core business or returning the cash to shareholders would also be well received by investors."

One of the most likely sectors to see non-core divestments would be oil & gas, market watchers said, though they declined to pinpoint specific companies.

A prominent Singapore company in that sector is blue-chip Keppel Corp, the world's biggest rigbuilder. It controlled 19 per cent of telco M1, 36 per cent of investment firm k1 Ventures, 31 per cent of upstream oil & gas exploration firm KrisEnergy and 24 per cent of offshore engineering company Dyna-Mac Holdings as at March 6 last year, according to its annual report for 2014. Both KrisEnergy and Dyna-Mac are loss-making.

Singapore investment firm Temasek Holdings, which holds a substantial stake in Keppel Corp, has been weighing the possibility of Keppel selling off its M1 stake, according to a Bloomberg report in January.

Given that the upcoming entry of a fourth telco is likely to trigger more competition in the industry, companies that hold non-core assets in this sector may be looking at divesting them before the new telco comes in, observers pointed out.

Media group SPH also happens to have a stake in M1. SPH Multimedia owned 13.32 per cent of M1 as at March 2 last year, according to M1's annual report for 2014.

But while M1 is being talked about as a potential non-core asset to be divested, telco giant Singtel has come up as a possible seller of assets instead. For instance, Singtel is already required by regulators to pare down its stake in fibre network infrastructure operator NetLink Trust (which it still fully owns) to 25 per cent or less by April 2018.

Singtel also holds 23 per cent of postal and e-commerce group Singapore Post, according to its 2015 annual report, down from 25.5 per cent in 2014. Analysts said in February that Singtel's fair value may be affected by a recent sharp fall in the share prices of Singtel's listed associates - especially SingPost, which fell to as low as S$1.29 in late January. (It was back up at S$1.60 last Friday, closing flat.)

Apart from telcos, transport is another sector where the prospect of heightened competition due to ride- sharing app companies such as Uber might lead owners of transport-related assets to divest, observers said.

Credit Suisse's Ms Kum added that other potential asset sellers might include banks, which "may be motivated to sell by the need to raise capital ratios". She did not give examples.

When DBS Group sold its stake in Bank of the Philippine Islands, it said in a 2013 press release that the sale was "in line with DBS's focus on its core markets of Singapore, Hong Kong, China, Taiwan, India and Indonesia".

OCBC has also sold its stakes in Fraser and Neave and Asia Pacific Breweries, though it is still hanging on to its insurance arm Great Eastern as well as engineering firm United Engineers. OCBC and Great Eastern were in talks to sell their stakes in United Engineers to Thai beer tycoon Charoen Sirivadhanabhakdi, but the bank said in February 2015 that the deal did not pan out.

Still, in the bigger scheme of things, observers said that most companies do not need to make non-core divestments.

Said TSMP joint managing director Stefanie Yuen Thio: "Companies should not make divestments as knee-jerk reactions to tough economic conditions. A reduction of costs, without a strategic business direction, is a race to zero . . . I don't see a huge wave of divestment happening."

Marcus Chow, partner at Bird & Bird, pointed out that "a disposal of non-core assets may not be easy in this climate, where most industries are not doing well, and potential buyers are sitting on cash rather than picking bargains".

Ong Chao Choon, advisory leader at PwC Singapore, said that companies still doing well may want to "build up a war chest for strategic acquisitions, as opportunities not previously in the market may become available in a downturn".

melissat@sph.com.sg

This article was first published on March 14, 2016.
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