Two lessons from KepLand cash call

Source : Business Times - 29 Apr 2009

SOME were surprised by Keppel Land’s $712 million rights issue announced last Friday. Though there had been whispers that the property developer was in need of funds due to its high gearing, those rumours had somewhat died down, thanks partly to the company’s indication that there was no need for a rights issue during its results briefing in January.

But, as BT understands it, the company was in early discussions with bankers about a potential rights issues at the beginning of the year.

Consider that Neptune Orient Lines (NOL) was rapped recently for not making a frank disclosure when market rumours of a rights issue were making their rounds. How then should one view Keppel Land? It would have been better if the company’s indication that it had no need for a cash call in January had also flagged its discussions with the banks. Preliminary or not, the fact that the negotiations took place suggested that a rights issue was an option being mulled over.

Instead, by just indicating that a rights issue was something that was unnecessary, it created the market perception that no cash call was forthcoming. Keppel Land shares subsequently enjoyed a rally over the last couple of months as property counters surged.

This was in contrast to CapitaLand’s response to talk of a rights issue earlier this year. The company told the market that it had made no decision on fund-raising and that it remained open to all forms of fund-raising. That signalled to the market that there was a possibility of a rights issue (which materialised in the end), although no decision was taken at the time.

Of course, many things can change over the course of a few months in the current environment. So it is possible that Keppel Land had no need to raise funds back in January, but has found itself in a different situation now.

Two conclusions can be drawn from the development. Considering the speculation over cash calls by Temasek-linked companies, Keppel Land should perhaps have been more circumspect when it responded to questions of a potential rights issue back in January. It could have said it had no need for fund-raising, but indicated that it was a possible option if circumstances changed. And between then and now, it could have found a way to alert the market that the situation had changed enough to warrant a cash call.

The other conclusion is that investors should not take such indications from companies at face value.

Concerns over Keppel Land’s high gearing had been highlighted as early as late last year, which led some analysts to ignore what the company said in January and stick to the position that it would sooner or later need to tap on shareholders for funds.

But shareholders who took Keppel Land’s word at face value now find themselves having to fork out more money or face being diluted by the rights issue. That the rights issue was priced at a 42 per cent discount offers some comfort - but it’s still not something that leaves a good taste in the mouth.