Temasek's direction under new management

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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