http://www.financeasia.com/article.aspx?CIaNID=105066
Temasek's direction
under new management
FinanceAsia.com, 9 Jun 2009, By Sameera Anand
Nomura research on Temasek reckons changes are likely under
incoming CEO Charles Goodyear and comments on the firm's returns on
its financial sector investments.
Charles Goodyear is slated to take over as chief executive officer
of Temasek from Ho Ching on October 1. This has prompted Nomura to
review the Singapore-based investment firm's track record and
strategies under Ching, and to draw inferences from Goodyear's
background as to how he will manage the firm. Its conclusions were
published in a research report last week.
The analysis of Temasek is what Nomura terms an anchor report, in
which it examines the key themes and value drivers upon which it is
basing sector views and stock recommendations. Temasek did not talk to Nomura for the
report.
Temasek has succeeded in geographically diversifying its portfolio,
Nomura commented, with Singapore
now accounting for one-third of its exposure, down from 50% five
years ago. However, despite the diversification,
Nomura estimated the portfolio was down 23% by May 2009 compared to
March 2008.
Nomura questioned whether Temasek
is over-exposed to the financial sector, as its exposure to the
sector has doubled to 40% in 2008 from 21% in 2004.
Given that a significant portion of the
investments in financials are held by Fullerton Financial
Holdings, Nomura speculated that Goodyear
could consider an initial public offering of Fullerton. Nomura has
suggested that Temasek might create a special purpose vehicle to
allow other investors to co-invest alongside Temasek. This would
enable Temasek to continue to invest in attractive opportunities
without significantly increasing its financial exposure, while
other investors could tap into Fullerton's operational
expertise.
Goodyear's past track record led Nomura to suggest that Temasek
could gear up the balance sheet as the cheapest form of raising
financing, a strategy he adopted at BHP Billiton. As is now widely
predicted, Goodyear is also
likely to increase investing in natural resources
assets, given his own familiarity with the sector.
Under Goodyear's stewardship, Temasek could also enhance its focus on
China, either through expanding existing
representative offices or by making further investments in local
private equity funds. Nomura also suggested that under Goodyear
Temasek could play a more active
role in Temasek-linked companies.
"We think Temasek's performance over the tenure of [Ho Ching's] term has
been respectable,"
wrote Nomura, referring to the increase in the portfolio value to
S$185 billion ($127 billion) in March 2008, from S$90 billion in
2004.
Temasek measures total shareholder return (TSR) by market value and
by shareholder funds. During its 34-year history, Temasek's TSR by
market value has been 18%, but Nomura noted that its performance has weakened in recent years,
with one-year TSR by market value falling to 7% as of March
2008. Nomura suggested Temasek could see a further
dip in TSR in the fiscal year to March 2009 due to losses on the
Merrill Lynch investment and the worsening of the financial crisis,
though it added that these may be cushioned by the sales of three
Singapore power generating companies during the course of the
year.
Nomura analysed in detail Temasek's "unprecedented loss" from the
investment in Merrill Lynch, terming the firm's decision to exit
the resultant stake in Bank of America in the first quarter of
calendar 2009 as surprising. Nomura referred to street estimates
that Temasek lost between $2.3 billion and $4.6 billion. It fielded
the criticism that Temasek
realised the paper loss in an untimely manner, just as the overall
market was recovering, by highlighting that Temasek
freed up capital and sectoral limits to increase its stake in China
Construction Bank.
Among the Singapore companies in its portfolio, DBS Group Holdings, Singapore Airlines, ST
Engineering and Neptune Orient Lines are likely to be strategic
investments for Temasek which it will continue to
own, said Nomura. Its holdings in SMRT Corporation, SembCorp
Industries, Singapore Telecom and StarHub could be trimmed, while
PSA International, Mapletree
Investments, Mediacorp, Changi Airport and Fullerton are potential
IPO candidates.
A merger between DBS and Standard Chartered does not seem likely in
the near future, Nomura said, as it is complicated by domicile,
legal and regulatory jurisdiction, and accountability. But Nomura
suggested that in the longer run it is an idea worth exploring as
it would be in Singapore's best interest to have a regional
financial powerhouse.
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