Sembcorp Group - DBS Research 2019-06-24: Parent Support On Debt Re-Profiling

Sembcorp Group - Sembcorp Industries & Sembcorp Marine | SGinvestors.io SEMBCORP INDUSTRIES LTD (SGX:U96) SEMBCORP MARINE LTD (SGX:S51)

Sembcorp Group - Parent Support On Debt Re-Profiling

  • Parent Sembcorp Industries to provide Sembcorp Marine with S$2bn loan for debt re-profiling and working capital.
  • Funded by issuance of S$1.5bn 5-year bonds and existing resources / facilities.
  • Eases concerns of an imminent cash call by Sembcorp Marine.
  • Order wins remain the key driver for earnings recovery.

Sembcorp Industries to provide subordinated loan to Sembcorp Marine.

  • SEMBCORP INDUSTRIES (SGX:U96) is providing its 61%-owned subsidiary SEMBCORP MARINE (SGX:S51) with a 5-year subordinated loan facility of S$2bn to strengthen Sembcorp Marine’s financial position amid the current downturn in the global offshore and marine (O&M) industry.
  • To fund the loan, Sembcorp Industries will issue S$1.5bn of bonds (5-year maturity @ 3.55% coupon) to DBS Bank as sole lead manager and initial purchaser through a private placement to investors which include Temasek. The remaining S$500m will be funded through Sembcorp Industries’s existing available resources and facilities.

Debt reprofiling and interest cost savings.

  • Sembcorp Marine will utilise the subordinated loan from parent to retire approx. S$1.5bn of borrowings, and the balance S$500m for working capital and general corporate purposes. Assuming the S$2bn was fully drawn as at end Mar-2019 resulting in net increase of S$500m in debt, Sembcorp Industries’s net gearing would increase from 1.09x to 1.15x while Sembcorp Marine from 1.47x to 1.68x.
  • Based on a ballpark estimate, the higher interest expense from the net loan increase should be marginal, offset by interest savings from the lower cost loan (estimated to be ~S$18m).

Eases concern of an immediate cash call

  • The board of directors of Sembcorp Industries and Sembcorp Marine believe the proposed financing option is in the best interests of the companies after considering a wide range of options.
  • Our sense is that the exercise buys Sembcorp Marine some breathing space as sector recovery takes time and hence, the urgency of a cash call in the near term is reduced. Management will continue to evaluate options to increase liquidity, and at some point a recapitalisation exercise, in our view.

Proxies to O&M recovery.

  • Sembcorp Industries (Rating: BUY; Target Price S$3.90) is a safer proxy to O&M recovery with its undervalued utilities business trading at 0.6x P/B while Sembcorp Marine (Rating: BUY; Target Price S$2.40) is the pure O&M blue chip name in Singapore. Order wins remain the critical factor for Sembcorp Marine at this juncture.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2019-06-24
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