Sembcorp Industries - OCBC Investment 2020-06-09: Separating From Marine

SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - Separating From Marine

As mentioned in our 27 April 2020 report - Sembcorp Industries - OCBC Investment 2020-04-27: Continues On Transformation Plan, bigger moves relating to Sembcorp Industries (SGX:U96)’s marine business are required, and the long-awaited news is out.
A S$2.1b renounceable underwritten rights issue for Sembcorp Marine (SGX:S51), followed by a proposed demerger of the two companies via a distribution in specie (“Proposed Distribution”) of Sembcorp Industries's stake in the recapitalized Sembcorp Marine to Sembcorp Industries shareholders has been announced. Sembcorp Industries shareholders are to receive between 427 and 491 Sembcorp Marine shares for every 100 Sembcorp Industries shares owned, with no cash outlay required. See Sembcorp Announcements.

A rights issue of up to 10.46b new Sembcorp Marine shares at an issue price of S$0.20 for each rights share has been proposed, on the basis of 5 rights shares for every one existing ordinary share. Gross proceeds are expected to be ~$2.1b (of which Sembcorp Industries is to subscribe up to S$1.5b of rights shares, and Temasek to subscribe for up to S$0.6b via a sub-underwriting arrangement with DBS).
The issue price of S$0.20 is at a 31% discount to the theoretical ex-rights price of S$0.29 as calculated based on the 5- day VWAP of S$0.74.

Sembcorp Industries and Sembcorp Marine will be seeking their respective shareholders’ approval for the Transaction at EGMs which are expected to be convened around end August / early September 2020. The rights issue is also conditional on Sembcorp Marine shareholders passing a resolution to waive their rights to receive a general offer from Temasek and its concert parties in connection with the Proposed Distribution, as Temasek may become a significant shareholder post the transaction.
Sembcorp Industries has given an undertaking to vote in favour of the rights issue resolution at Sembcorp Marine’s EGM. The Proposed Distribution and the rights issue are inter-conditional, and will only proceed if shareholder approvals are received for all resolutions at both companies’ EGMs.

The marine segment has been a drag on Sembcorp Industries for some time, and the de-merger would allow Sembcorp Industries to focus on providing its suite of energy/utilities and urban solutions. Indeed, there may be potential for a re-rating of the stock as the market’s concern of a privatisation of Sembcorp Marine is now removed.
See Sembcorp Share Price; Sembcorp Target Price; Sembcorp Analyst Reports; Sembcorp Dividend History; Sembcorp Announcements; Sembcorp Latest News.
We tweak our assumptions and our fair value estimate for Sembcorp Industries is raised from S$1.63 to S$2.00.
See also report: Sembcorp Marine - OCBC Investment 2020-06-09: Finally Some New Developments.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-06-09

SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.00 UP 1.630