Keppel dropped 25%, what’s happening?

If you’ve noticed Keppel Corp‘s share price taking a hit today, don’t be too alarmed. While it’s uncommon for a Singapore blue chip to drop more than 20% within a trading session, the reason for this decline is due to Keppel going ex-dividend.

To clarify, Keppel Offshore & Marine’s ownership has been transferred to a new company in exchange for a 54% stake in Sembcorp Marine. As a result, Keppel Corp distributed a 49% stake in Sembcorp Marine to its shareholders at a rate of 19.1 Sembcorp Marine shares for every 1 Keppel Corp share. This distribution has caused Keppel Corp’s value to decrease, and consequently, its share price has also fallen.

However, you may be wondering if a 25% drop is an appropriate response to this distribution. To determine a fair price or theoretical ex-dividend price, the explanation can be quite complex. Nevertheless, let’s try to break it down.

Method 1 for calculating Keppel Corp’s theoretical ex-dividend price

First, we note that Keppel Corp’s share price closed at $7.32 as of 22 Feb 2023, while Sembcorp Marine closed at $0.134. Since Keppel Corp distributed 19.1 shares of Sembcorp Marine to its shareholders for every 1 Keppel Corp share held, 19.1 shares of Sembcorp Marine would be worth $2.559.

Next, we deduct this value from Keppel Corp’s share price to arrive at its ex-dividend price, which should be $4.781 ($7.32 – $2.559). However, this is not the final price, as we must also add back the disposal gains.

According to UOB Kay Hian analyst Adrian Loh, the divestment gain per share amounts to $2.21. Adding this back to Keppel Corp’s ex-dividend price, we arrive at its theoretical ex-dividend price of $6.99.

Finally, we compare this theoretical price with Keppel Corp’s actual share price of $5.46 to conclude that it is undervalued.

Method 2 for calculating Keppel Corp’s theoretical ex-dividend price

Method 2 for calculating Keppel Corp’s theoretical ex-dividend price is simpler and is based on its pre- and post-ex-dividend net tangible assets (NTA) per share and price-to-NTA ratio.

Before the ex-dividend, Keppel was trading at $7.32, and its NTA was $5.51 per share, which results in a price-to-NTA ratio of 1.33x.

Post-ex-dividend, Keppel was trading at $5.46, and its NTA was $5.23 per share, which results in a price-to-NTA ratio of 1.04x.

The theoretical ex-dividend price of Keppel can be calculated by multiplying its post-ex-dividend NTA by its pre-ex-dividend price-to-NTA ratio, which gives a value of $6.96. This is close to the price obtained using Method 1.

Therefore, based on this calculation, Keppel Corp’s share price has declined too much and is undervalued.

While the Keppel Corp’s current share price may appear to be undervalued, it is important to note that it doesn’t mean the share price would always move closer to the theoretical price. There can be many other factors that may drive the share price movements. Your investment horizon, objective and risk appetite are important considerations too.

Basically, think before you act!