SINGAPORE (Dec 16): This year, a total of 19 listed companies are undergoing privatisation, and being merged or acquired – more than the eight last year and the 14 in 2017. As it is, close to $20 billion worth of mergers and acquisition (M&A) deals involving the four major developers in Singapore have been concluded since the start of the year.

In an outlook report by DBS Group Research, lead analyst Yeo Kee Yan believes that some of the factors spurring M&A activity are cheap valuations, cash-rich companies, low liquidity and strong brand franchise.

Meanwhile, some of the privatisation deals were fuelled by cheap valuation, lack of trading activity, cost of maintaining listing, and the need to restructure and streamline operations.

Despite the STI’s stable performance in 2019, valuation remains inexpensive, compared regional peers. This, coupled with green shoots of recovery, should revive interests in Singapore equities, adding further fuel to the M&A momentum.

Yeo expects the momentum in M&A deal flows to continue.

Additionally, Temasek’s ongoing restructuring adds another spin to the M&A scene, as Temasek-linked companies are under pressure to raise their ROE and dividend payouts. According to Yeo, this can be achieved through optimal use of capital structure; seeking inorganic earnings growth; restructuring, mergers and acquisitions to sustain long-term competitiveness in the global arena; divestment of companies in non-performing sectors which face long-term challenges; and higher dividend payouts for cash-rich companies.

On the other hand, local REITs are always quick to snap up data centres, on the back of the rise in internet penetration, growth in IoT and development of 5G. With this trend in mind, Yeo predicts that Singtel may seek to unlock value in its data centres via a public listing. Singtel currently owns about $2 billion worth of data centres.

“If Singtel seeks to unlock value in these data centres via a public listing, the proceeds can be used to fund Bharti’s expansion, which is in need of US$1 billion to deleverage and acquire assets,” says Yeo.

Yeo believes that the value proposition for listing will be enhanced if Temasek-owned ST Telemedia combines its 94 data centres with Singtel to create a much larger entity to attract international funds.

REITs on acquisition spree

In efforts to increase their asset under management (AUM) and market cap to gain investor visibility, SREITs have been on an acquisition spree, resulting in positive market reaction with increased international fund flows and better visibility.

In this year alone, Manulife US Commercial REIT, Fraser Centrepoint Trust and Keppel DC REIT have been successfully added to the ERPA NAREIT index. Yeo expects Ascott REIT to be up next after its merger with Ascendas Hospitality Trust completes.

Growth within the REIT space was boosted by asset acquisition, followed by bouts of capital-raising exercises. This year saw about $9 billion raised to fund M&A deals.

2019 started with news of CapitaLand acquiring Ascendas Singbridge for $11 billion, and following that several other notable deals were announced, including the merger of Ascott and Ascendas Hospitality assets, the merger of OUE Commercial Trust and OUE Hospitality Trust and even smaller-scale REITs like iREIT Global found a new sponsor in City Development. Sabana REIT gained a new sponsor with Vibrant Group selling its stake to ESR group.

“We expect the trend of consolidation within the REIT space to continue, especially among mid-cap industrial REITs such as AIMS APAC REIT (AIMS), Cache Logistics (Cache) and Soilbuild REIT. These REITs are trading at attractive yields in excess of 7.0-8.5%, which prohibits them from pursuing acquisitions as they will unlikely be accretive given their high cost of capital,” says Yeo.

“With ESR raising its stakes in AIMS and Sabana, this is the beginning of consolidating its presence in the logistics segment. We believe that the proceeds raised from ESR’s recent IPO will provide additional financial power to fund possible M&A of REITs that it is eyeing and also new property acquisitions,” adds Yeo.

Stocks to watch

At the crux of the trade war, DBS sees opportunities from trade diversion. The research house believes that this will especially benefit the tech sector as suppliers within the electronics equipment supply chain may look into M&A or privatisation, instead of relocation and changing suppliers.

Potential candidates in the tech space are Hi-P, Fu Yu, Spindex and Sunningdale. “These companies are illiquid with low free float, net cash and trading at attractive valuations,” says Yeo.

In the consumer space, companies with strong brand equity are usually highly sought after. The research house believes that Delfi, Thai Beverage and Wilmar stand out with their brand franchise, market leadership as well as strong distribution network.