Restructured GLCs set to lead any market recovery:
Low valuations and rising yields enhance attractiveness

By Mano Sabnani, Business and Financial Consultant

Government-linked companies have come in for quite a lot of bad publicity in the last two years.

We have heard about their bungles in making takover bids overseas or locally, about restructuring necessitated by over-expansion or over-diversification; about loss of competitiveness and being outdated technologically. Some have incurred losses and these have not been inconsiderable. Heads of some top managers have rolled and many ordinary workers have suffered due to layoffs. The spate of bad news from GLCs, sometimes known as Temasek-linked companies, may not have come to an end.

But the worst is probably over for these companies, which, to their credit, have been more pro-active in dealing with their problems. They have generally taken the bull by the horns, whatever the problems faced. The problem-solving actions have, at times, come a little late, due to late recognition or acceptance. A case in point is the PSA corporation, which was in denial mode until the big change in top management. Now that the challenge from Malaysian ports is taken seriously, the giant company is moving fast to re-focus on its core business and restore competitiveness. The new PSA is shedding excess staff and aiming to be flexible and market-oriented.

Besides PSA, we have seen how Chartered Semiconductor Manufacturing (CSM) has struggled to make itself more viable as a going concern. It made some money in the good years of the semiconductor cycle but once the crunch came, all hell broke lose. It became clear that CSM was not flexible in a reduced demand situation and lagged behind its Taiwanese and other competitors in technological prowess. New management at CSM, homegrown as it may be, has moved to strengthen the balance sheet (through a recent, albeit unpopular, rights issue) and to close redundant capacity, while tying up with IBM for joint technological development.

Keppel Corporation, whose only major fault was to over-diversify, has in the last two years consolidated its marine and offshore activities and sold its publicly-listed bank, strengthening its balance sheet in the process. The parent company now has a world-class core business to draw investors. Meanwhile, top management has made subsidiary Keppel T and T divest of its loss-making internet and technology businesses and re-focus on network engineering, which is said to have potential. Keppel Land, a sizeable company on its own, remains a viable property arm for the group.

SembCorp Industries has had a harder time restructuring and re-focusing. Under previous leadership, it became a catch-all for any kind of business, including Delifrance and Pacific Internet. Now, the group is focused on engineering services, including utilities, construction, marine and environment. But besides marine and utilities, profits have yet to flow strongly and the group still has to divest of low yielding assets like Pacific Internet and its various industrial parks. Hence, investor hesitation, despite evidence the group is turning around.

The other major GLCs in the news have been CapitaLand, DBS Bank and Singtel. Of the three, Singtel is now in the clear, having shown that its large Australian Optus acquisition, while not coming cheap, is starting to pay off earlier than expected. Singtel's other regional associates are now strongly pulling their weights and helping the group emerge as a leading regional player, especially in the cellular phone sector. As the Singapore market matures, growth will be driven by its regional entities.

As for DBS Bank, after the failed takeover of Overseas Union Bank, it is now working hard on reaping the benefits of its earlier POSB acquisition and its enlarged footprint in Hongkong achieved via the expensive purchase of Dao Heng Bank. The integration of POSB and Dao Heng is almost over, and with it the write-offs and staff reduction. The group just has to deliver the profits now, but that is being held back by slack loan demand and soft interbank rates. Hence the reduction this week in its prime and deposit rates, to help sustain margins. Its extensive branch network will help the group retain market share in consumer banking but corporate and investment banking remains depressed.

Right now, the big picture is still not conducive to investment. The Singapore economy may languish in the first half, if the tension in the Middle East is not resolved and the US shows no clear recovery path. Everyone knows that. But if these uncertainties were to be put out of the way, our GLC valuations would be significantly higher. Singtel at $1.35, CSM at 70 cents, SembCorp Industries and CapitaLand at around $1, DBS Bank below $10 and Keppel Corp below $4 all reflect crisis values. The market has not recognised that most of these companies are leaders in their core industries and have strong government backing. Leadership changes have also taken place in some of them, giving them better market and customer orientation.

This is especially significant, considering that interest rates are now at very low levels. A 12-month deposit of under $50,000 with DBS Bank will only earn you a miserable one percent, which is probably just able to offset the effects of inflation. If you are risk averse, the stock market is not an alternative. On the other hand, take some risk and look at the GLCs and the rewards in one year's time may be a pleasant surprise. Dividend yields should handsomely surpass bank interest lost while capital gains, if any, could be the bonus.