Sembcorp Industries - CGS-CIMB Research 2020-06-09: Parting Ways With Sembcorp Marine

SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - Parting Ways With Sembcorp Marine

Upgrade Sembcorp Industries (SGX:U96) to ADD with a higher Target Price of S$2.49 (S$1.25 post distribution). This assumes 0.6x FY19 P/BV of Sembcorp Industries stub and Sembcorp Marine (SGX:S51)’s TERP at S$0.27.
We are positive on the deal as Sembcorp Industries is recapitalising up to S$1.5bn of rights in Sembcorp Marine and demerging its c.61% stake in Sembcorp Marine via dividend in specie.

Having a cleaner structure as energy and urban development could rerate Sembcorp Industries. Structural challenge of getting long-term contracts remain.

Sembcorp Marine will raise c.S$2.1bn equity via a 5-for-1 renounceable rights issue of up to 10,463,723,020 new ordinary shares at S$0.20 per rights share. Sembcorp Industries will subscribe for up to S$1.5bn of rights shares and Temasek Holdings will sub-underwrite the remaining S$0.6bn.
With the proceeds, Sembcorp Marine will repay Sembcorp Industries's S$1.5bn subordinated loan facility. This is followed by Sembcorp Industries distributing its 61% stake in Sembcorp Marine via dividend in specie.
Sembcorp Industries shareholders should receive between 427 and 491 Sembcorp Marine shares for every 100 Sembcorp Industries shares owned depending on the number of rights Sembcorp Marine’s shareholders subscribed.
Assuming the proposal is approved, timeline for Sembcorp Industries’s shareholders to receive Sembcorp Marine shares would be around end-Sep/early-Oct 2020.

Our estimated proforma excluding perps BV for Sembcorp Industries for FY20F is at S$3,726m, or S$2.09 per share. We believe market could ascribe a 0.6x P/BV band for Sembcorp Industries stub to account for its energy and urban development business to S$1.25 per share. Although we estimate that forward ROE to be about 8% for FY20F, execution and confidence in management could take time to rebuild.
In addition, we assume Sembcorp Marine's share price to slide by c.30% from last closing price (S$0.85) to S$0.68 as market could view the rights as highly dilutive, resulting in Sembcorp Marine’s TERP of S$0.27.
We also use an average of 459 distributed shares in Sembcorp Marine per 100 Sembcorp Industries shares as a base to calculate the Sembcorp Marine shares to be distributed to Sembcorp Industries shareholders.
In total, Sembcorp Industries shareholder could get S$2.49 based on our assumptions above. See Figures 1 and 2 in PDF report attached below for calculation.

The positive is risk of funding issue could be resolved with the recapitalistion and repayment of debt. Sembcorp Marine expects proforma FY19 net gearing to improve from 1.82x to 0.45x. Temasek will become a direct shareholder of Sembcorp Marine with a stake of more than 30% or 58% if minority shareholders of Sembcorp Industries and Sembcorp Marine do not take up the right.
We think having a direct control in Sembcorp Marine paves the way for potential yard consolidation with Keppel O&M.
In the near-term, we think the dilution of rights could put pressure on Sembcorp Marine's share price.
See Fig1 in PDF report attached below for calculation of Theoretical Ex-Rights Price (TERP) of Sembcorp Marine.
See Sembcorp Marine Share Price; Sembcorp Marine Target Price; Sembcorp Marine Analyst Reports; Sembcorp Marine Dividend History; Sembcorp Marine Announcements; Sembcorp Marine Latest News.

See Fig2 in PDF report attached below for calculation of Sembcorp Industries’s target price based on worst case, base case and best case scenarios.
We think market has undervalued Sembcorp Industries’s stub (energy and urban development) and the stock could rerate on
1. new CEO’s reviewing and restructuring,
2. FY21 y-o-y improvement in earnings without Sembcorp Marine losses and post Covid sentiment.
See Sembcorp Industries Share Price; Sembcorp Industries Target Price; Sembcorp Industries Analyst Reports; Sembcorp Industries Dividend History; Sembcorp Industries Announcements; Sembcorp Industries Latest News.
Sembcorp Industries's EPS remains intact for now.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-06-09

SGX Stock Analyst Report ADD UPGRADE HOLD 2.49 UP 1.76